A production possibilities table for two products, shoes and handbags, is found below. Usual assumptions regarding production possibilities are implied.
Combination
shoes handbags
A 0 6
B 17 5
C 31 4
D 43 3
E 53 2
FF 62 1
G 67 0
a) What is the opportunity cost of producing the first handbag? Justify your answer.
b) Calculate numbers to show that the opportunity cost is increasing.
2) Explain why a producer who is causing external costs does not have the incentive to reduce these costs.
3) Explain why quantity supplied increases with increasing price of a product.
4) Explain in detail how a decrease in consumer demand for a product will result in less of the product being produced and in fewer resources being allocated to its production.
5) Suppose an economy’s real GDP is $21,000 in year 1 and $24,000 in year 2.
(a) What is the growth rate of real GDP per capita if population was 101 in year 1 and 102 in year 2. Include your calculations.
(b) What effect the growth rate have on consumers?
6) What effect should each of the following have upon the demand for portable music players in a competitive market? Explain your reasoning in each case.
(a) the development of improved, low-priced devices that compete with music players
(b) consumer expectations of substantial price decreases in music players
7) Personal computers are becoming less expensive as new technology reduces the cost of production. In a supply and demand model,
explain the effects of the technological innovations and their effect on the quantity of computers in the market.
8) Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply that causes the shift.
(a) Fast-food meals. The government imposes a significant tax on fast-food meals.
(b) Automobiles. Consumer incomes rise as the economy moves out of recession.
9) Discuss supply factors of economic growth pertinent to today’s economy.
10) Give two examples of investment spending that can increase the future production capacity of the economy:
(a) by business firms and
(b) by government
11) “The Internet is non rival, which means it is a public good”. Do you agree or disagree? Explain.
12) The following is a list of figures for a given year in billions of dollars. Using this data, calculate: (a) GDP; (b) Net exports.
Billions
of dollars
Transfer payments $ 16
Government purchases 50
Personal taxes 38
Corporate income taxes 28
Taxes on production and imports 15
Social Security contributions 8
Undistributed corporate profits 19
Proprietors’ income 25
Compensation of employees 258
Personal consumption expenditures 310
Consumption of fixed capital 13
Rents 10
U.S. Exports 12
Corporate profits 70
Interest 12
Dividends 23
Imports to U.S. 160
Gross private domestic investment 69
Net foreign factor income 10
Statistical discrepancy 35
13) Explain how the price of financial stocks rises and falls in response to changes in supply and demand.
