Q1. Imagine that a country can produce just two things: goods and services. Assume that over a given time period it could produce any of the following combinations:

Units ofgoods 0 10	20	30	40	50	60	70	80	90	100
Units ofservices 80 79	77	74	70	65	58	48	35	19	0

1. Draw the country's production possibility curve.
2. Assuming that the country is currently producing 40 units of goods and 70 units of services, what is the opportunity cost of producing another 10 units of goods?
3. Explain how the figures illustrate the principle of increasing marginal opportunity cost.
4. Now assume that technical progress leads to a 10% increase in the output of goods for any given amount of resources. Draw the new production possibility curve. How has the opportunity cost of producing extra units of services altered?

Q2. Assume that Harry Ellis produces table lamps in the perfectly competitive table lamp market.

OUTPUT PER WEEK	TOTAL COSTS	AFC	AVC	ATC	MC
0	$100
1	150
2	175
3	190
4	210
5	240
6	280
7	330
8	390
9	460
10	540

1. Fill in the missing values in the table
2. Suppose the equilibrium price in the table lamp market is $50. How many table lamps should Harry produce, and how much profit will he make?
3. If next week the equilibrium price of table lamps drops to $30, should Harry shut down? Explain.

Q3. Ted has acquired a monopoly in the production of cricket balls and faces the demand and cost situation shown in the following table.

PRICE ($)	QUANTITY (PER WEEK)	TOTAL REVENUE	MARGINAL REVENUE	TOTAL COST ($)	MARGINAL COST
20	15 000			330 000
19	20 000			365 000
18	25 000			405 000
17	30 000			450 000
16	35 000			500 000
15	40 000			555 000

1. Fill in the remaining values in the table.
2. If Ted wants to maximise profits what price should he charge and how many cricket balls should he sell? How much profit will he make?
3. Suppose the government imposes a tax of $50 000 per week on cricket ball production. Now what price should Ted charge, how many cricket balls should he sell and what will his profits be?

Q4.

1. Draw a graph showing the deadweight loss from a negative externality in production and illustrate and explain how a Pigouvian tax can eliminate the deadweight loss.
2. Draw another graph showing the deadweight loss from a positive externality in consumption and illustrate and explain how a Pigouvian subsidy can eliminate the deadweight loss.