Assignment 2

ASSIGNMENT 2

4. Draw and Explain a production possibilities frontier for an economy that produces corn and rice. What happens to this frontier if a new fertilizer is developed that increases the amount of corn that can be produced on each acre of land?

The PPF in this case will follow the law of increasing opportunity cost which states that as the economy increases its production of any good along its PPF, the opportunity cost of obtaining an additional unit of the good (in terms of the foregone good) will be increasing. This will result in a non-linear curve , it will be a concave curve

When a new fertilizer increases the amount of corn production, the opportunity cost of corn production will be lowered. This will lead to a shift in the PPF

1. Draw a circular flow diagram.Identify the parts of the model that correspond to the flow of goods and services and the flow of dollars for each of the following activities.

a.Martin earns $15 per hour working in a factory

b.Matilda spends $6 for Pizza

c.Madeline's Bakery pays $500 for the rent on its shop

d.Maria purchases a new pair of earrings for $200

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2. Imagine a society that produces military goods and consumer goods ,which we'll call "guns" and "butter"

a.Draw a production possibilities frontier for guns and butter. Using the concept of oppotunity cost, explain why it most likely has a bowed-out shape.

b. Show a point that is impossible for the economy to achieve.Show a point that is feasible but inefficient

c.Imagine that the society has two parallel parties ,called the Hawks(who want a strong military) and the Doves(who want a samller military). Show a point on your PPF that the Hawks might choose and a point the Doves might choose.

d.Imagine that an aggressive neighboring country reduces the size of its military. As a result both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend", measured by the increase in butter production? Explain

Ans:

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a. It is bowed because the opportunity cost of butter is calculated based on the number of guns and butter the economy is producing. If the economy produces lot of butter, people who are best suited/skilled to make guns are engaged to produce butter. As a result decrease in each unit of gun production results in a small increase in the butter production. The opportunity cost of producing butter is more and the slope is steep for the PPF. While on the other hand, if the economy is producing lot of guns, people skilled in butter production are being used to produce guns. So for each unit decrease in gun production results in huge increase of butter production. The opportunity cost of producing butter is less which means the slope is less resulting in a flat PPF.

b.The point A which is outside the PPF is impossible to achieve by the economy.

Point B which is inside the PPF is feasible but inefficient because all resources are not used for production.

c. The Hawks might choose point H, where guns are produced more and less of butter is produced.

The Doves might choose D, where more butter and less guns are produced.

d.The Hawks will get a bigger "Peace Dividend" if the production of guns are reduced by the same number by both Hawks and Doves. This is because the frontier is flatter at point H than point D, which means that reducing the production of guns at point H will lead to more production of butter than reducing the production of guns at point D.

3.The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a production possibilities frontier to illustrate society's trade off between two goods - a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop a new way of producing electricity that emits fewer pollutants.

The shape and position of the PPF depend on how costly it is to maintain a clean environment vs the quantity of industrial output produced.

If engineers develop a new way of producing electricity that emits less pollutant, will lead to a shift in PPF as shown above

4. An economy consists of three workers: Larry,Moe and Curly.Each works 10 hours a day and can produce two services :mowing lawns and washing cars.In an hour, Larry can either mow one lawn or wash one car;Moe can either mow one lawn or wash two cars;and Curly can either mow two lawns or wash one car.
a. Calculate how much of each service is produced under the following circumstances,which we label A,B,C,D:

1. all three spend all their time mowing lawns(A)

2. all three spend all their time washing cars(B)

3. all three spend half their time on each activity(C)

4. Larry spends half his time on each activity,while Moe only washes cars and Curly only mows lawns(D)

b. Graph the production possibilities frontier for this economy. Using your answers to part(a),identify points A,B,C,D on your graph

Ans :

1. 40 lawns mowed, 0 cars washed

2. 0 lawns mowed,40 cars washed

3. 20 lawns mowed,20 cars washed

4. 25 lawns mowed,25 cars washed

6.Classify each of the following statements as positive or normative. Explain.

1. An increase in the minimum wage will increase the rate of teenage unemployment

2. The government should raise the tax on tobacco to reduce the quantity of cigarettes sold

3. An increase in the rate of growth of the money supply will lead to a rise in the price level

4. An increase in the interest rate will cause a decline in investment

5. The government should provide healthcare to anyone who does not have health insurance.

Ans

A . Positive

B. Normative

C. Positive

D. Positive

E. Normative