Question

 

Problem 1

 

Bill can produce either tables or chairs. Bill can work up to 10 hours a day. His production possibilities are given in the table below:

 

Tables	Chairs
0	100
10	80
20	60
30	40
40	20
50	0

1. Construct the production possibilities frontier (PPF) for Bill. Put tables on the Horizontal axis and chairs on the vertical axis.
2. What is Bill’s opportunity cost of producing one additional table?
3. What is Bill’s opportunity cost of producing one additional chair?
4. Currently Bill is producing 20 tables and 40 chairs.

1. Is this allocation of resources efficient? Why?
2. Show this allocation on the graph and advise Bill how he can be more efficient.

Problem 2

Suppose the market for corn is given by the following equations for supply and demand:

            QS = 2p − 2

            QD = 13 − p

where Q is the quantity in millions of bushels per year and p is the price.

1. Calculate the equilibrium price and quantity.
2. Sketch the supply and demand curves on a graph indicating the equilibrium quantity and price.
3. Calculate the price-elasticity of demand and supply at the equilibrium price/quantity.

4. The government judges the market price is under expectations and announces a price floor equal to $7 per bushel.

1. Would there be a surplus or a shortage?
2. What would be the quantity of excess supply or demand that results?
3. Use the graph to show you results.

Answer 1

b. The bill's opportunity cost of producing one additional table is 1/2 chair. It means when bill produce 1 more unit of table it need to sacrifice 1/2 unit of chair.

c) The bill's opportunity cost of producing one additional chair is 2 tables. It means when bill produce 1 more unit of chair it needs to sacrifice 2 unit of table.

d) when bill produce 20 table and 40 chairs the allocation of resources is not efficient because actual Production fall short of its capabilities. If there is wastage or inefficient utilisation of resources, then economy will operate at any point inside the PPF(Like E).

2. Given Qs = 2p - 2 and Qd = 13 - p

At equlibrium Qs = Qd

2p - 2 = 13 - p

3P = 15 so equilibrium price(p) = 15/3 = 5

Qd = 13 - p = 13 - 5 = 8

So equilibrium quantity = 8.

When government fixed price 7 as price floor, it act as binding price floor. So no seller can sell goods below $7. So there is surplus.

Surplus = supply - demand

Supply at $7 = 2(7) - 2 = 12.

Demand at $7 = 13 - 7 = 6.

So surplus = 12 - 6 = 6( show in above diagram)