Draw the production possibilities frontier for a country that produces only two goods, steeland rice. The curve should be bowed out from the origin.

a)What is the economic explanation of the bowing out of the curve?

b)Show two points on the diagram at which the economy is operating efficiently. What is common about those points, and what is different?

c)Assuming that the economy is always operating efficiently, does the opportunity cost of rice increase, decrease, or stay constant as more rice is produced?

d)How can you represent on the diagram the phenomenon of inefficient or wasteful production?

e)What economic meaning can be given to points that lie beyond the curve?

f)How would the production possibilities frontier shift if the following events occurred?

i)The country's labor force increased.

ii)A new miracle strain of high-yield rice was developed.

iii) An earthquake destroyed many of the country's factories.

The world is composed of two countries, Farmeria and Securitania. Each has 1,000 workers, and each produces just two goods, guns and butter. All workers in Farmeria have the same skills, as do all workers in Securitania; the skills differ between the two countries, however. In Farmeria, each worker can produce either 10 pounds of butter a day, or one gun. In Securitania, each worker can produce either six pounds of butter a day, or two guns.

a)Draw the production possibilities frontier for each country, clearly labeling the axes.

b)Explain why the curves you have drawn in a) are straight lines or bowed.

c)Compare the opportunity costs of producing guns in Farmeria and Securitania. Where is gun production cheaper?

d)Compare the opportunity costs of producing butter in Farmeria and Securitania. Where is butter production cheaper?

e)Suppose that each country devotes half of its labor to each good. Show the production point in each diagram. How much of each good will be produced in each country? What is the total global production of guns and butter?

f)Suppose now that each country produces nothing but the good in which its labor force is particularly skilled. Show the production point in each diagram. Compare the global production of guns and butter to your answer in part e).

Concept Covered:Supply and Demand: Equilibrium

4. These are the supply and demand schedules for good X:

QuantityQuantity

PriceSuppliedDemanded

$10183

9164

8145

7126

6107

588

469

3410

2211

1012

a)What is the equilibrium price and quantity? At this equilibrium, what is the producer's revenue?

b)If the government sets a price of $8 for X, what will be the price, quantity, and revenue? Will there be a shortage or surplus of X?

c)If the government sets a price of $3, answer the same questions as in b).

d)Suppose the demand for X increases, so that at each price, consumers want to buy three more units of the good. What happens to price, quantity, and revenue? Why has the quantity sold not increased by three units?

Concepts Covered:Supply and Demand:Changes in Determinants and Illustration of Government Interference with Free Market

5. Use supply and demand curves to show the change in the price of bread and the quantity sold, when these events occur:Note one graph for each letter (total 7). HINT:Bread and Potatoes are Substitutes;Price Floor (effective price above market equilibrium) Price Ceiling(effective price below market below market equilibrium)

a)The population grows.

b)People's incomes fall and unemployment increases in a recession.

c)The price of potatoes rises.

d)The price of butter rises.

e)A drought occurs in the wheat-growing regions.

f)To protect farmers' incomes, the government sets an effective price floor for wheat.

g)To protect consumers from inflation, the government sets an effective price ceiling for bread.