Dr. Barry Haworth

University of Louisville

Department of Economics

Economics 201-01

Fall 2010

Homework #1 (due by 10:00pm on Tuesday, September 14)

Please submit your answers to this homework through the assignment link on Blackboard. No credit will be given for answers submitted in class or emailed to me.

To access and then submit this homework assignment, first log into Blackboard and go to “Assignments”. There should be a link that says “Homework #1”. Using this link should enable you to view and then start answering the homework questions. When you’re done, you may submit your answers, but note that once your homework is submitted for grading, you cannot go back and change anything. Note that once you start the homework, it’s possible to save your work and return to the assignment later on, before finally submitting the homework for grading. Just remember that you cannot submit homework after the due date or the homework is considered late.

Please note the instructions for the various problems in this section.

Homework Questions 1 and 4

Your answer in each of the four parts of question #1 and both parts of question #4 below involve your determining the opportunity cost of producing a certain good (e.g. Q #1, it's cake or pie).  In question #1, you do this for each of the two individuals (Bill and Ted).  When submitting your answer, understand that your answer can be "technically correct" but graded as "wrong" because you didn't follow directions.  For grading purposes, a wrong answer is still be considered wrong - even if your mistake is "only" a result of not following directions.

In that regard, please note the following comments below.

   (i) If you get a fraction for your answer, you can either leave the fraction as is or you can put your answer in decimal form (i.e. you can record your answer as 2/5 or 0.4).  Do not write your answer as a compound fraction or mixed number (i.e. do not write an answer like 5/2 as 2 1/2 - leave it as 5/2 or write it as 2.5).

   (ii) If you record your answer as a fraction, then you must reduce that fraction to its simplest form (e.g. record your answer as 2/5 instead of 4/10).

   (iii) Except for 0.25 and 0.75 (see below), all other decimals should be rounded to the nearest 10th (e.g. 0.1 or 3.4, rather than 0.12 or 3.35).

(iv) If your answer is 0.25 or 0.75 (only), then you can record it as 0.25 or 0.75.  You should not round 0.25 or 0.75 up to 0.3 or 0.8 respectively.

1. In one period, Bill can either bake 8 units of cake, or 10 units of pie.  In the same time period, Ted can either bake 2 units of cake or 5 units of pie. Given this information, answer each of the following questions below.  Note that we are looking for incremental or marginal opportunity cost in these problems.

For Bill:

(a) What is the opportunity cost of producing each additional unit of cake?

(b) What is the opportunity cost of producing each additional unit of pie?

For Ted:

(c) What is the opportunity cost of producing each additional unit of cake?

(d) What is the opportunity cost of producing each additional unit of pie?

2. Given the information in Question 1 about Bill and Ted's ability to produce cake and pie, which of the following is a correct statement.

• Bill has a comparative advantage in producing cake because he gives up fewer units of pie than Ted when doing so (i.e. when both individuals produce additional units of cake).
• Bill has a comparative advantage in producing cake because he can produce 1 more unit of cake per period than Ted.
• Ted has a comparative advantage in producing cake because he gives up fewer units of pie than Bill when doing so (i.e. when both individuals produce additional units of cake).
• Ted has a comparative advantage in producing cake because he can produce 1 less unit of cake per period than Bill.

3. Given the information in Question 1 about Bill and Ted's ability to produce cake and pie, which of the following is a correct statement.

• Bill has a comparative advantage in producing pie because he gives up fewer units of cake than Ted when doing so (i.e. when both individuals produce additional units of pie).
• No one has a comparative advantage in producing pie here, because both Bill and Ted produce the same amount per period.
• Ted has a comparative advantage in producing pie because he gives up fewer units of cake than Bill when doing so (i.e. when both individuals produce additional units of pie).
• Both Bill and Ted have a comparative advantage in producing pie because each produces the same number of units each period.

4. The table below represents the production possibilities for automobile tires and rubber mats.

	A	B	C	D	E	F
Automobile tires	0	4	8	12	16	20
Rubber mats	30	28	24	18	10	0

Note that the questions below refer to incremental or marginal opportunity cost.

(a) As this Country moves from pt. C to pt. D, what is the opportunity cost of producing each additional unit of automobile tire?

(b) As this Country moves from pt. B to pt. A, what is the opportunity cost of producing each additional unit of rubber mat?

5. Referring to the (PPC) table provided above in Question #4, what can you say about the opportunity cost associated with producing automobile tires and rubber mats in this country?

· This PPC reflects increasing opportunity cost

· This PPC reflects decreasing opportunity cost

· This PPC reflects constant opportunity cost

· This PPC reflects increasing opportunity cost with tires and decreasing opportunity cost with rubber mats

· This PPC reflects increasing opportunity cost with rubber mats and decreasing opportunity cost with tires

6. Assume that Country X has a production possibilities curve (PPC) for onions and chives. That PPC has onions on the vertical axis and chives on the horizontal axis (note that the location of these two goods on the graph is something to note. Assume further that a series of events takes place. Match the event from the first list to the most likely item from the “Effect on Country X’s PPC” list just below it. Each event will have only one effect, and it’s technically possible to have the same effect for two or more different events.

Event:

1. How does the migration of low skilled laborers out of Country X (and into Country W) affect the PPC of Country X?

2. How does higher unemployment in agriculture affect the PPC of Country X?

3. How does greater productivity in the harvesting of onions affect the PPC of Country X?

4. How does improved technology in both onions and chives affect the PPC of Country X?

5. How does an increased demand for onions within Country X affect the PPC of that country? (note: assume Country X is at full employment before and after this last change in demand)

Effect on Country X’s PPC:

A. Movement from a point inside this PPC to a point that's on the PPC

B. Movement from a point that's on this PPC to a point inside the PPC

C. Movement between 2 points, up along the PPC (i.e. toward onions)

D. Movement between 2 points, down along the PPC (i.e. toward chives).

E. Increase (shift outward) in the PPC that affects both goods

F. Decrease (shift inward) in the PPC that affects both goods

G. Increase (pivot outward) in the PPC that affects only onions

H. Increase (pivot outward) in the PPC that affects only chives

I. Decrease (pivot inward) in the PPC that affects only onions

J. Decrease (pivot inward) in the PPC that affects only chives