Economics 100.

1
Exercise 1 ANSWER KEY

PART I
A production possibilities table for two commodities, food and clothing, is found below. The table is
constructed given the resources of the society and the existing state of technology. Food is measured in
100,000 metric tons and clothing in units of 100,000.
Combination Food Clothing ∆Food ∆Clothing ∆Clothing/∆Food
A 0 7 ------- ------- -------
B 7 6 7 -1 -0.14
C 13 5 6 -1 -0.17
D 18 4 5 -1 -0.20
E 22 3 4 -1 -0.25
F 25 2 3 -1 -0.33
G 27 1 2 -1 -0.50
H 28 0 1 -1 -1.00

a) Plot the data using food on the horizontal axis and clothing on the vertical axis to obtain the PPF.

b) Would it be possible for the economy to produce 13 units of food and 5 units of clothing at any one
time? Why or why not?
Yes, the required resources to produce the said combination of food and clothing are within the
available resources in the economy (the combination is along the PPF).

c) Would it be possible for the economy to produce 18 units of food and 5 units of clothing at any one
time? Why or why not?
No, the required resources in the economy is insufficient to produce the combination, the point is
outside thre PPF.

d) What happens to the PPF if there is an increase in the available resources, e.g. workers and capital,
used in the production of food and clothing?

The entire PPF will shift outward.

e) Suppose a new technique was discovered that allowed food manufacturers to increase their output.
Illustrate what happens to the PPF if the economy finds a way to enhance the production of food only.
f) Complete the table above. Explain the trend in the cost of producing the first up to the seventh unit of
clothing in this economy. Is the trend related to the concept of “increasing opportunity cost”. Why or
why not?

The opportunity cost of producing clothing must be solved first. That is, obtaining the change in food
over the change in clothing. You’ll see that the cost of producing the 1st to the 7th unit of clothing in
terms of food is increasing in absolute terms, hence related to the concept of increasing opportunity
cost.

PART II
Assume the PPF of Angelica Jolly in making movies and
salad dressing is given by this figure. Assume also that she
is intimately involved in the production of her salad dressing
(she surely has other people make it for her, but assuming
that would ruin this problem). What effect would the
following events have on this graph? Show your answers
graphically.
a) She gets more efficient cooking equipment for her
famous salad dressing.
b) She decides that now that she's in her 70’s she needs to take a nap during the day.

c) She decides she'd rather make more salad dressing and fewer movies.

d) Today's movies start to take more time to shoot per film.

e) Usually Angelica's business sense is sharpest in the morning and her acting ability is sharpest in the
afternoon. But Angelica inadvertently acts in the morning and makes salad dressing in the afternoon.
 PART III

Assume that in your Farmville™ account, you produce only two goods, milk and artichokes, with labor
coins as production input (all other inputs in caeteris paribus). Suppose the total labor coin hour available
in your account is worth 2000. If it takes 1/2 labor coin hour to produce a unit of milk while 8 labor coin
hours to produce an artichoke. Construct the PPF of your Farmville™. What is the opportunity cost of
producing more artichokes? how about more milk?

OC of
change in change in producing OC of producing
Milk Artichokes
milk artichokes more more milk
artichokes
4000 0 - - - -
3840 10 -160 10 -16 -0.0625
3200 50 -640 40 -16 -0.0625
3040 60 -160 10 -16 -0.0625
2720 80 -320 20 -16 -0.0625
2560 90 -160 10 -16 -0.0625
2400 100 -160 10 -16 -0.0625
2080 120 -320 20 -16 -0.0625
1600 150 -480 30 -16 -0.0625
1280 170 -320 20 -16 -0.0625
800 200 -480 30 -16 -0.0625
320 230 -480 30 -16 -0.0625
80 245 -240 15 -16 -0.0625
0 250 -80 5 -16 -0.0625

PART IV

1. In a televised debate, one economist commented that food prices were high because of weather-related
factors. Another economist commented that prices were high to induce consumers to increase
spending on other goods. Which of the statements is normative and which is positive? Explain.

The first economists who said that prices were high because of weather-related factors used positive
economics while the latter used normative economics. The latter is normative since the economist
 used subjective evaluation of price behavior and prescribing that high food prices were set to induce
consumption spending.

2. Comment on this: Scarcity is implies that all choices entail some costs in the form of tradeoffs.

With scarce resources, individual, firm, or any other economic actor has to choose from its array of
wants and needs to address. Choosing one implies forgoing other choices, or what we call the tradeoff.
The cost of making a decision or choice is the value of the next best and unselected choice.
Economics 100.1
Exercise 2 ANSWER KEY

Part I.
5 Effective demand
10 Increase in supply
3 Consumer income
2 Technology
6 Prices of substitutes
1 Immigration
4 The law of diminishing returns
7 Equilibrium level of output
9 Surplus
8 Decrease in quantity supplied

Part II.
F (1)
F (2)
F (3)
T (4)
F (5)
T (6)
F (7)
T (8)

Part III.
(a) Increases, 2 thousand
(b) Decreases, 4 thousand
(c) (insert your graph here)
(d) P 1.20, 6 thousand
(e) P 0
(f) ms = 0.2, md = -0.3
(g) Demand will shift to the left since consumers will now prefer to buy more of red meat (shift factor: change in
tastes and preferences)
(h) (on the same diagram, demand curve will shift to the left)
(i) Approximately, P 0.96, 4.8 thousand pounds
(j) If it is the price of tilapia that changed
(k) If the DOH announces that it is eating tilapia that prevents illnesses like cancer.

Part IV. (refer to diagrams below)

Market D or S L or R Shift Factor Price will be Output will Diagram
Change be
(a) D L Change in Lower Lower B
tastes
(b) S L ↑ in costs ↑ ↓ D
(c) D R ↑ in # of ↑ ↑ A
buyers
(d) D L ↓ in p of ↓ ↓ B
substitute
(e) S L ↑ in costs ↑ ↓ D
(f) D R ↑ in income ↑ ↑ A
(g) S R ↑ in ↓ ↑ C
technology
(h) Depends on which curve N/A Depends on which curve Different
shifts more shifts more scenarios
P P
S S

D’ D

D D’

(A) Q (B) Q

P S P S’

S’ S

D D

(C) Q (D) Q