Answers to Practice Questions for Midterm 1

1) Production Possibility Frontier (ppf)

a) Opportunity costs, and specifically increasing opportunity costs are displayed by the ppf diagram. The slope of the ppf is negative everywhere to suggest the tradeoff between butter and guns. That is, more butter always means less guns, and more guns always means less butter. In other words, there is a cost (opportunity cost) to getting more of one good. The opportunity costs are increasing as represented by the "bowed out" ppf. As we get more and more guns, the cost of getting one more gun, means more and more butter. The same is true for getting more and more butter - we have to give up increasingly more guns.

b) Point A.

c) Point E.

d) Point D.

e) No points satisfy this, since all points attainable by ppf0 are also attainable by ppf1.

f) An increase in resources for production (like more laborers or capital) or better technology that applies to both goods. Both ppfs display increasing opportunity costs because they are "bowed out."

2) Demand and Supply Curves

a) Graph these things out for yourself !!

EX 1: Change in equilibrium price (P) is ambiguous (could go up, down, or stay the same); change in equilibrium quantity (Q) is an increase.
EX 2: Change is P is up; change in Q is ambiguous.
EX 3: Change in P is down; change in Q is ambiguous.
EX 4: Change in P is ambiguous; change in Q is down.

b) The price floor will not affect the market price if it is below the equilibrium market price. A price floor says that the price cannot go below a certain minimum price, but if the market price is naturally above it, the price floor does not affect the market and thus has no effect. In other words, there will be no excess demand

c) Similar to above, a price ceiling that is above the equilibrium price will have no effect on the market, because it is below the maximum price set by the price ceiling.

3) Elasticities

KNOW HOW TO CALCULATE ELASTICITIES !!!

a) This must be a demand curve, since when the price goes down (from point A to point B), quantity goes up, showing an inverse relationship.

Elasticity from A to B: percentage change of quantity divided by the percentage change in price.
= ((12-8)/8) / ((50-100)/100
= (4/8) / (-50/100)
= 1/2 * -1/2
= -1 Absolute value is one, implying UNIT ELASTIC!

Elasticity from B to A: percentage change of quantity divided by the percentage change in price.
= ((8-12)/12) / ((100-50)/50
= (-4/12) / (50/50)
= -1/3 * 1/1
= -1/3 Absolute value is less than one, implying INELASTIC!

b) This must be a supply curve since increases in price are connected with increases in quantity, and the same is true for decreases in as well - when p goes down, q goes down.

Elasticity from C to D: percentage change of quantity divided by the percentage change in price.
= ((30-20)/20) / ((100-80)/80
= (10/20) / (20/80)
= 1/2 * 4/1
= 2 Absolute value is greater than one, implying ELASTIC!

Elasticity from D to C: percentage change of quantity divided by the percentage change in price.
= ((20-30)/30) / ((80-100)/100
= (-10/30) / (-20/100)
= (-1/3) * (-5/1)
= 5/3 Absolute value is greater than one, implying ELASTIC!