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

Problem 1:

Bill’s opportunity cost of producing one additional table= Unit sacrifice of chair / units gain of tables

Unit sacrifice of chair from point B to C= 100-0= 100

Units gain of tables from point B to C= 0+50= 50

Bill’s opportunity cost of producing one additional table= 100/50= 2 units of chair

Bill’s opportunity cost of producing one additional chair= Unit sacrifice of tables / units gain of chairs

Unit sacrifice of tables from point C to B= 50-0= 50  

Units gain of chairs from point C to B= 100

Bill’s opportunity cost of producing one additional chair= 50/100= 0.5 Units of table

Currently Bill is producing 20 tables and 40 chairs:

a. No this allocation of resource is not efficient because the quantity of chairs need to be 60 with 20 units of tables or 30 units of tables with 40 units of chairs for production to be efficient and lie on PPC.

b. This allocation represented by point A in the graph above. The Bill can be more efficient if it will improve the technology that help to increase the quantity produced of chair to be 60 units while quantity of tables remain same or this technology will help to increase the quantity of table by 10 units while quantity of Chairs remain same.