Problem Set 1 - Colgate University



ECON 201 Spring 2000

Problem Set 1

Due February 10

1. Suppose a manufacturing firm is equipped to produce ratios of calculators. It has two plants, the East Plant and the West Plant, at which it can produce these goods. Given the labor and capital available at both plants, it can produce the combinations of the two goods at the two plants shown below.

| |Output per day, East Plant | |

|Combination |Calculators |Radios |

|A |100 |0 |

|B |50 |25 |

|C |0 |50 |

| |Output per day, West Plant | |

|Combination |Calculators |Radios |

|D |50 |0 |

|E |25 |50 |

|F |0 |100 |

a. With calculators on the vertical axis and radios on the horizontal axis, draw the production possibilities curve for the East Plant.

b. On a separate graph, draw the production possibilities curve for the West Plant.

c. Which plant has the absolute advantage in producing calculators? Radios? Explain.

d. Which plant has the comparative advantage in producing calculators? Radios? Explain.

e. Now draw the combined production possibilities curve for the two plants.

f. Suppose the firm decides to produce 100 radios. Where will it produce them? How many calculators will it be able to produce? Where will it produce the calculators?

2. Mankiw, chapter 1, problems and applications #3.

3. All other things unchanged, what happens to the demand curve for video rentals if there is

a. an increase in the price of movie theater tickets?

b. a decrease in family income?

c. an increase in the price of video rentals?

4. Using a supply and demand graph for each event, show graphically and explain in words the effect of each event on the price and quantity in that particular market.

a. How did the heavy rains (causing massive flooding) in South America in 1997 affect the market for coffee?

b. The Surgeon General decides french fries aren’t bad for your health after all and issues a report endorsing their use. What happens to the market for french fries?

c. A new technique is discovered for manufacturing computers that greatly lowers their production cost. What happens to the market for computers?

5. Children under the age of 2 are now allowed to fly free on U.S. airlines; they usually sit in their parents’ laps. Some safety advocates have urged that they be required to be strapped in infant seats, which would mean their parents would have to purchase tickets for them. Some economists have argued that such a measure would actually increase infant fatalities. Can you explain why? Consider that many families with small children would see car travel as an alternative to airline travel.

6. Using the Internet, find information on the United States Council of Economic Advisers. What does the Council do? Who is the current chair and who are the other members? Write a short essay describing what you found.

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