Principles of Macroeconomics
Eco 200

Announcements/Assignments

Fall 2007

Sep 12 - Chapters One and Two,  Case and Fair

A PPC exercise:

Agraria is a an agricultural country with a given amount of economic resources and given technology that produces only two
products: corn and plows.

Its (annual) production possibility schedule (table) for these two products is shown below.

Production
Choices
Corn
(1000 bushels)                                     Plows (100 sets)
A            1000                                                         0

B            980                                                           1

C            940                                                           2

D            880                                                           3

E            800                                                           4

F            700                                                           5

G            570                                                           6

H            410                                                           7

I              220                                                          8

J                0                                                            9

a.     Draw the production possibility curve of this economy.
b.     What is the opportunity cost of producing the fourth (one hundred sets of) plows?
c.     If the country is producing 700,000 bushels of corn and four sets of plows, how is its economy performing? Explain.

d.    What does moving from the production choice H to G mean for this economy? Compare moving from G to H to
moving from C to D.
e.    Suppose initially this economy is producing 700,000 bushels of corn and three hundred sets of plows. What is
the opportunity cost of increasing its production of plows to 500 sets? Explain.
f.    What is (on average) the opportunity costs of the 930th (1000) bushel of corn?
g.    Suppose each year four (100) sets of plows break and become obsolete. The country chooses the production mix
C, producing 940,000 bushels of corn and two (hundred) sets of plows. Will the country be able to sustain this level
of production. Explain.
h.    What should this country do to grow its economy, assuming that its technology and economic resources
remain unchanged.
i.    What is the effect an increase in Agraria's population on its economy?
j.    Suppose the country's farmers find a new (and better) way to apply fertilizer. What is the effect this discovery on the
country's economy (PPC)?
k.   As a result of excessive rain and floods, Agraria loses 25 percent of its fertile lands. What is the effect of this loss
on Agraria's economy (PPC)?Explain.
l.    Short of growing its economy, how is it possible for Agraria to choose a consumption mix outside it production
possibility curve?

Review Questions (1)

1.  Explain the concept of  "opportunity cost" by an example involving a personal decision.
2.  Explain the concept of  "opportunity cost" by an example involving a public policy (government) decision.
3.  True of False: In order to benefit from international trade we should encourage exports while limiting imports. Explain.
4.  Explain why persistent inflation is considered an economic problem?
5.  What is the basic economic problem we all face both individually and collectively?
6.  What do economists mean by "ceteris paribus?"
7.  What is the "ceteris paribus" assumption important in developing economic theories and models?
8.  Give an example of the "fallacy of composition."
9.  What does a downward sloping line (curve) drawn in a two-dimensional space (with each axis measuring one variable)
reflect?
10. What does the slope of a line (curve) drawn in two-dimensional space measure?
11. Try to show the relationship between a person's age and his or her height from birth to death in a two-dimensional
diagram.
12. Draw a 45-degree ray in a the northeastern quadrant of a diagram. Pick three arbitrary points on the ray. From each point
draw a straight line to each of the two axes. Examine your diagram carefully. What kind of observations can you from this
exercise?
13. What kind of economic system do we have in the US?
14. Name a country whose economic system is very different from that of US. Explain the main differences between the two
economies.
15. How do we measure and judge the performance of an economy.
16. Explain the difference between nominal and real GDP.
17. What are the primary economic resources?
18. What is the approximate size of the American labor force?
19. What percentage of the American labor force is female?
20. What percentage of the employed American labor force is employed in the private service sector?

A Supply & Demand Exercise (Answers)
Consider the US market for new sport utility vehicles (SUVs). Determine how each of the following would affect the supply, the
demand, the equilibrium price, and the equilibrium quantity in this market, ceteris paribus.
Hint: Think about the most immediate effects.

a. An increase in the price of gasoline:
Demand will .....................
Supply will ...................
Equilibrium price will ...............
Equilibrium quantity will ............

b. Weather forecasters predict a harsh and stormy winter:
Demand will ..............
Supply will ..........
Equilibrium price will ..............
Equilibrium quantity will ............

c. In their negotiations with UAW, automobile manufactures agree to a 10 percent wage increase for all auto
workers:
Demand will ..............
Supply will ....
Equilibrium price will ...............
Equilibrium quantity will ...............

d. It is announced that government studies conclude that SUVs are more likely to turn over in the event of an
accident:
Demand will .......................
Supply will .............
Equilibrium price will ................
Equilibrium quantity will ..............

e. To reduce their inventories auto dealerships offer large discounts and special deals on their SUVs:
Demand will ............
Supply will ..............
Equilibrium price will ..............
Equilibrium quantity will ..............

f. While the economy is booming and incomes are going up, a new robot technology enables auto manufacturers to
significantly reduce labor costs and increase efficiency:
Demand will ....................
Supply will ....................
Equilibrium price will .....................
Equilibrium quantity will .............
a. An increase in the price of gasoline:
Demand will .decrease/shift to the left
Supply will .not change............
Equilibrium price will .decrease...............
Equilibrium quantity will .decrease..............

b. Weather forecasters predict a harsh and stormy winter:
Demand will .increase/shift to the right
Supply will .not change............
Equilibrium price will .increase...............
Equilibrium quantity will .increase..............

c. In their negotiations with UAW, automobile manufactures agree to a 10 percent wage increase for all auto
workers:
Demand will .not change.............
Supply will .shift to the left.....
Equilibrium price will .increase................
Equilibrium quantity will .decrease..............

d. It is announced that government studies conclude that SUVs are more likely to turn over in the event of an
accident:
Demand will .decrease/shift to the left
Supply will .not change............
Equilibrium price will .decrease...............
Equilibrium quantity will .decrease..............

e. To reduce their inventories auto dealerships offer large discounts and special deals on their SUVs:
Demand will .not change.............
Supply will .increase/shift to the right
Equilibrium price will .decrease...............
Equilibrium quantity will .increase...............

f. While the economy is booming and incomes are going up, a new robot technology enables auto manufacturers to
significantly reduce labor costs and increase efficiency:
Demand will .increase/shift to the right
Supply will .increase/shift to the right
Equilibrium price will .(may) increase or decrease
Equilibrium quantity will .increase..............