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Unit 2. Choice in a World of Scarcity

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Assignment 2. Budget Constrain and Production Possibility Frontier

Learning Objectives

At the end of the lesson student will be able to:

• Recognize how individuals make choices based on their budget constraint

• Identify the concept of opportunity cost

• Interpret production possibilities frontier model.

• Contrast a budget constraint and a production possibilities frontier

• Explain the relationship between a production possibilities frontier and the law of diminishing returns

• Contrast productive efficiency and allocative efficiency

Main Contents

1. Budget constrains

2. A simple but important model: Production Possibility Frontier: The Trade-Offs.

3. Law of Increasing Opportunity Cost

4. Optimal Allocation

Online Resources

• OpenStax College. Social Science /Macroeconomics, 2nd Ed/ Chapter 2, pgs. 27-44.

• McConnell, Campbell; Brue, Stanley; and Flynn, Sean; “Economics, Principles, Problems, and Policies”. 18th Edition, New York, 2009), students will read the chapters 1 “Limits, Alternatives, and Choices” (pages 3-10).

• and click on “Introduction to Economics”

• “Adam Smith” (1723-1790) / and one of the other recommended reading. They will extend your understanding of why the term “Division of Labor” is important in economics.

• Video. Using the Production Possibility Curve to Illustrate Economic Conditions.

• ECO LOWN DOWN / .

• Ray, Margaret; and Anderson, David. “Krugman’s Macroeconomics for AP”. Worth Publishers/BFW, 2011

• Anderson, David. “Economics by Examples”. Worth Publishers/BFW, 2007

To Do in Class

• Take notes and complete the vocabulary and key terms.

• Answer the Study Questions by using your notes and the online textbook “OpenStax College” Social Science /Macroeconomics, 2nd Ed/ Chapter 2, pages 27-44.

Additional Textbook: McConnell, Campbell; Brue, Stanley; and Flynn, Sean; “Economics, Principles, Problems, and Policies”. 18th Edition, New York, 2009), students will read the chapters 1 “Limits, Alternatives, and Choices” (pages 3-10).

Vocabulary and Key Terms

• allocative efficiency

• budget constraint

• invisible hand

• law of diminishing marginal utility

• marginal analysis

• normative / positive statement

• opportunity cost

• utility

• Production possibilities curve / frontier

• Law of increasing opportunity costs

• Economic growth

1. Study Questions (Typing is required)/ Save you work / Submit your work via “schoology” on September 28, 2019)

1. Suppose Alphonso’s town raised the price of bus tickets to $1 per trip (while the price of burgers stayed at $2 and his budget remained $10 per week.) Draw Alphonso’s new budget constraint. What happens to the opportunity cost of bus tickets?

2. What are the similarities between a consumer’s budget constraint and society’s production possibilities frontier, not just graphically but analytically?

3. Use this information to answer the following 4 questions: Marie has a weekly budget of $24, which she likes to spend on magazines and pies.

a. If the price of a magazine is $4 each, what is the maximum number of magazines she could buy in a week?

b. If the price of a pie is $12, what is the maximum number of pies she could buy in a week?

c. Draw Marie’s budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of the budget constraint?

d. What is Marie’s opportunity cost of purchasing a pie?

4. Explain why scarcity leads to tradeoffs.

5. Explain why individuals make choices that are directly on the budget constraint, rather than inside the budget constraint or outside it.

6. What does a production possibilities frontier illustrate?

7. Why is a production possibilities frontier typically drawn as a curve, rather than a straight line?

8. Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts)

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a. Show these data graphically. Upon what specific assumptions is this production possibilities curve based?

b. If the economy is at point C, what is the cost of one more automobile? Of one more forklift? Explain how the production possibilities curve reflects the law of increasing opportunity costs.

c. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 fork lifts, what could you conclude about its use of its available resources?

d. What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production?

e. Referring to the table, suppose improvement occurs in the technology of producing forklifts but not in the technology of producing automobiles. Draw the new production possibilities curve.

f. Now assume that a technological advance occurs in producing automobiles but not in producing forklifts. Draw the new production possibilities curve.

g. Now draw a production possibilities curve that reflects technological improvement in the production of both goods

11. What is productive efficiency? Allocative efficiency?

12. Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table below will produce the desired output.

a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end?

b. Assume now that a new technique, technique 4, is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer.

c. Suppose that an increase in the labor supply causes the price of labor to fall to $1.50 per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? Explain.

d. “The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible.” Evaluate this statement. Does your answer to part c, above, bear out this contention? Explain

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Vocabulary and Questions are due on September 10-11, 2019 (according to your class schedule) at 2:30 pm. Work on time for a good grade. Submit your assignment to mdelatorre@

To Do After Class

2. Watch a video about Adam Smith and Writing a Paper Review (Typing)

Visit and click on “Introduction to Economics”. Watch the video. Then, answer the following questions:

• Who is Adam Smith?

• Comments about his more important contribution to Economics.

• What is the meaning of the term “Invisible Hands”?

Long reviews are not necessarily good reviews. Please limit your review to one page at most. In terms of length, about 300 to 400 words. Follow an appropriate format: assignment should be typed, double-spaced, using 12-point font. Identify your written assignment by including your name, student’s ID, class period, class code, and title of the assignment on the upper right corner of the paper. DO NOT TURN IN hard copies of your work to your professor. You will email me your assignment (mdelatorre@ or mdelatorre@doralcollege.edu)

Due Date September 15, 2019, at 11:59 pm. Submit your assignment to mdelatorre@

3. Work on Econ Lowdown Online Course. / Due on September 16, 2019, at 11:59 pm

Take the courses “Opportunity Cost” and “Production Possibility Frontier “from Econ Lowdown. ECON Lowdown: .

Log in as a STUDENT by using the information you are Student Code and Password). The Pre-Test score does NOT count as a grade.

4. Work on Problem Set 1. (Worksheets 1.1 to 1.8) / Due on September 13, 2019

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