What are the specific assumptions that underlie the production possibilities curve?

Problem 1

Below is a production possibilities table for consumer goods (wheat) and capital goods (guns). Graph the data using Excel and then answer the following questions.

 

  A B C D E F G
WHEAT 0 100 200 300 400 500 600
GUNS 140 130 110 90 70 40 0

 

 

  1. What are the specific assumptions that underlie the production possibilities curve?
  2. What would be the cost of more food if the economy is at point C? What would be the cost of producing more guns? How does the shape of the production possibilities curve reflect the law of increasing opportunity costs?
  3. What if this hypothetical economy were producing only 80 butter and 100 guns and it was depicted by this production possibilities table and curve, what conclusions could be drawn about this economy’s resource utilization?
  4. Can this economy produce outside its current production possibilities? How can technological changes affect the production possibilities curve? How can international trade permit consumption above its production possibilities curve?

 

 

Problem 2

 

Evaluate each of the supply and demand scenarios below by answering the following questions:

  • How will each affect equilibrium price and equilibrium quantity in a competitive market?
  • Will price and quantity rise, fall, or be unchanged?
  • Based on the magnitudes of the shifts, will the answers be indeterminate?

Provide appropriate graphs to illustrate your answers and use supply and demand to verify your answers.

 

  1. Demand decreases and supply is constant.
  2. Demand increases and supply increases.
  3. Supply decreases and demand is constant.
  4. Supply increases and demand decreases.
  5. Demand increases and supply decreases.
  6. Demand decreases and supply decreases.
  7. Demand increases and supply is constant.

 

 

Problem 3

 

Suppose that the demand and supply schedules for bushels of wheat are as given in the table below.

 

Price Demand Supply
5 40 170
4 60 150
3 90 90
2 100 70
1 300 30

 

 

  1. What is the market equilibrium wheat price per month and the market equilibrium number of wheat demanded and supplied?
  2. If the local government can enforce a price-control law that sets the maximum price of $2.00, will there be a surplus or a shortage? Of how many bushels? And how many bushels will actually be sold?
  3. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum price that can be charged is $4.00. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many bushels? And how many bushels will actually be sold?
  4. Suppose that the government wishes to decrease the market equilibrium price by increasing the supply of wheat. Assuming that demand remains unchanged, by how many units of wheat would the government have to increase the supply of wheat in order to get the market equilibrium rental price to fall to $2.00?

 

 

 

 

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