Problem Set 01 (Eco100) - W2010

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  • Topic: Economics, Production-possibility frontier, Opportunity cost
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Prof. Gustavo Indart Department of Economics University of Toronto

ECO 100Y INTRODUCTION TO ECONOMICS Problem Set 1
1. Labour is the only resource in an economy with the following maximum production possibilities. (The graph is drawn as a curve rather than points under the assumption that opportunity cost is constant between options.) Option 1 2 3 4 a) b) c) d) e) f) Clothes (Tons) 50 40 20 0 Food (Tons) 0 30 70 100

What is the opportunity cost of increasing Clothes production from 20 to 40 tons? What is the opportunity cost of increasing Food output from 70 to 100 tons? Is point D an output option for this economy? Explain your answer. What does point B represent in terms of resources? Is point C a greater output combination than A? Explain. What change in the economy is necessary to produce 50 tons of Clothes and 50 tons of Food if the labour force remains unchanged?

2. A country produces capital and consumer goods using two resources—capital and labour. The following table describes this country Production Possibilities Curve: Option Capital Goods (Units) Consumer Goods (Units) a) b) c) d) e) f) g) A 30 0 B 28 10 C 25 19 D 20 25 E 15 30 F 10 35 G 0 40

What is the opportunity cost of adding the 30th unit of consumer goods? What is the opportunity cost of increasing capital goods output from 25 to 30 units? What is the opportunity cost of increasing output from 15 capital goods and 25 consumer goods to 20 capital goods and 25 consumer goods? Opportunity cost is constant between which options? Draw the production possibility curve (PPCt) that results from technological change that increases capital goods production by 33% without affecting consumer goods output. Draw a curve on the diagram representing the production possibility curve following a war that destroys half the country's land, labour, and capital. Label this curve PPPW. Suppose depreciation is 15 units of Capital. Will the Production Possibilities curve be smaller, unchanged, or greater...
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