Dr. Barry Haworth
University of Louisville
Department of Economics
Spring 2012
Economics 202-01
M/W 9:30-10:45am
1. a. As
the country of Bart’s World moves from pt B to pt C, the opportunity cost of
producing each additional unit of pork rinds is 1/2 unit of donuts (or 0.5
units of donut)
b. As the country of Bart’s World moves from pt C to pt B, the opportunity cost
of producing each additional unit of donut is 2 units of pork rinds
c. As the country of Homer's
d. As the country of Homer's Island moves from pt Y to pt X, the opportunity
cost of producing each unit of donuts is 1/4 unit of beer (or 0.25 units of
beer)
2. Given the information in Question 1 about these two countries, there are two correct statements:
(a) Bart’s World has a comparative advantage in producing pork rinds
(d) Homer’s
3. Even after calculating the new values for opportunity cost within Homer’s Island, we still get:
(a) Bart’s World has a comparative advantage in producing pork rinds
(d) Homer’s
4. According to the article, the (three) underlying sources of labor productivity growth studied by economists are:
(a) increase in the amount of capital per worker
(b) improvements in the quality of the workforce
(e) improvements in technology and the organization of production processes
5. a. As this economy moves from pt. B to pt. C, the opportunity cost of producing each additional unit of radish is 5 units of turnip
b. As this economy moves from pt. E to pt. D, the opportunity cost of producing each additional unit of turnip is 1/5 of a unit of radish (or 0.2 units of radish)
6. a. Answer: B. Movement from a point that's on this PPC to a point inside the PPC
Explanation: Unemployment is associated with a decrease in the utilization of labor, rather than a decrease in the potential output associated with using all available laborers. Therefore, we get no shift in the PPC (since there was no change in the availability of labor), but rather we get movement to a point that’s further inside the PPC (as unemployment does imply that we get less output of gasoline).
b. Answer: D. Movement between 2 points, down along the PPC (i.e. toward heating oil).
Explanation: Increased demand for heating oil (with no accompanying change in unemployment – which we can assume means we start and finish with zero unemployment) implies movement along PPC in order to get more heating oil (and less gasoline) produced. Changes in demand do not lead to a shift as we have no change in this country’s potential output. If we start at a point that’s on the PPC, then there is no unemployment at our starting point, and if we end at point that’s on the PPC, there is no unemployment at our ending point. Therefore, moving between these two points implies no change in unemployment.
c. Answer: G. Increase (pivot outward) in the PPC that affects only gasoline
Explanation: Increased productivity associated with producing gasoline implies an increase (shift out) in the PPC for gasoline production only as we are reflecting a change in the potential output for gasoline (not heating oil). There is no change in the point where only heating oil is produced, but elsewhere the PPC is shifting outward.
d. Answer: F. Decrease (shift inward) in the PPC that affects both goods
Explanation: When laborers from Country X migrate to other countries we get a decrease (shift inward) in the PPC of Country X for both goods since the potential output for both goods is lower (due to a decrease in the availability of laborers within Country X).
e. Answer: E. Increase (shift outward) in the PPC that affects both goods
Explanation: Technological improvements in production of both goods increases the PPC of Country X (shift out) because there is greater potential output for both goods with improved technology.
f. Answer: F. Decrease (shift inward) in the PPC that affects both goods
Explanation: War in Country X that destroys capital will lead to a decrease both in the availability of capital within this country. Less capital leads to a decrease in the production and refining of crude oil, and a lowering of this country’s potential. This can be demonstrated as a general decrease in the PPC (shift inward) to reflect lower potential output for both goods.
g. Answer: A. Movement from a point that's inside this PPC to a point on the PPC
Explanation: Just as with the first answer above, there is no shift in the PPC, but we get movement from a point that’s inside this PPC toward a point that’s on the PPC.
h. Answer: E. Increase (shift outward) in the PPC that affects both goods
Explanation: Investment in Country X will increase the amount of available capital within this country. More capital leads to an increase in the potential output for these two goods, which is demonstrated as a general increase in the PPC (shift outward).