Homework # 2 Spring 2008 Econ. 5 Dr. Olmsted Due: 2/14/2008

SHOW YOUR WORK. Indicate which formulas you are using and do not simply report single numbers. Where possible, use a graph, but also provide verbal explanations. Please draw all graphs to scale. You may wish to use graph paper. Working in a group is encouraged, but please make sure that each group member understands how to answer all the questions. When turning in your homework as a group, please give me one copy for the group and include the names of all those involved, in alphabetical order. Groups can be between 2 and 4 individuals.

1. a) Given the following information, graph a production possibility curve.

H2O in Ag	Agriculture	Industry	H2O in Indu
800 600 400 200 0	450 400 325 200 0	0 100 200 300 400	0 200 400 600 800

b) What is the opportunity cost of increasing industrial production by 100 units? Explain.

c) What is the opportunity cost of increasing industry from 200 to 201 units?

d) Identify on the graph drawn for a at least one point where water use in ag and indu combined is 600. Should the economy be producing at that point?

e) In a separate graph, explain and show graphically the impact of a drought. (Total H₂O available is 600 units.)

f) In a separate graph, explain and show graphically what would happen if a new production process is developed which cuts the water use needs of industry in half. (In other words, 200 units of industry can now be produced using only 200 units of H₂O.)

2. Assume that you have two friends, Ziggy and Pop, who are planning a party. They have one hour to prepare. Ziggy can make snacks at a rate of 3 snacks per 15 minutes, while Pop makes snacks at 4 per 15 minutes. Ziggy can make party drinks at a rate of 5 per 15 minutes, while Pop makes drinks at a rate of 8 per 15 minutes.

a) Draw PPCs for Ziggy and Pop.

b) What is the opportunity cost of a drink for Ziggy and Pop?

c) Explain who has the absolute and comparative advantage in drinks and snacks.

d) Can they make 16 drinks and 20 snacks in an hour? Who is going to do what? Identify the solution on the graph as well as explaining in words.

e) Show how the solution to part d is preferable to a solution where they each spend half of their time on each activity.

f) Show how your graph will change if Ziggy takes a bartending class and can now make drinks twice as fast has he could before.

g) What will the new opportunity cost of a drink be?

h) Now who has the absolute and comparative advantage?

i) If each specializes, how many drinks and snacks can be made in an hour?

3. Please answer the following multiple choice questions, but be sure to explain your answer, which may include using graphs, calculations, as well as a written explanation.

I. A successful consumer boycott of lettuce is expected to cause

A. An increase in the equilibrium quantity of lettuce bought and sold.
B. An increase in the price of lettuce.
C. A decrease in the demand for lettuce.
D. A decrease in the supply of lettuce.

II. Which of the following will NOT cause an outward shift of a PPC?

A. An increase in a nation's technological know-how.
B. A reduction in the amount of unemployed resources.
C. An increase in natural resources.
D. An increase in capital resources.

III. The production possibilities curve illustrates

A. Trade-offs facing a society.
B. That more of one product can be produced only by reducing the quantity of other products that are being produced, assuming that resources are being used efficiently.
C. The maximum output that can be produced with a limited amount of resources.
D. The opportunity cost of alternative choices.
E. All of these.

IV. If a 10% increase in price leads to a 12% decrease in quantity:

A. demand is elastic.
B. supply is elastic.
C. the elasticity is -.8.
D. none of the above.

4. The disappearance of anchovies off the coast of Peru in 1972 caused a scramble for protein-rich substitutes, notably soybeans. Because soybeans were used in animal feed, higher soybean prices eventually translated into higher cattle prices. Explain and show graphically what happened in the anchovy, soybean and cattle markets. Indicate which curves shifted in each instance and show the effects on the equilibrium price and quantity in the relevant market.

5. Identify the relevant economic concepts raised by the Sierra club article. Are there economic concepts we have discussed that these articles fail to address?