Name:_________________________

ECO 200 820 Principles of Macroeconomics Homework #1, due Friday, 2/9

  1. Suppose the country of Mexico produces only two goods: oranges and sweaters. The production possibilities curve is graphed below.

    2.  

     
     


    1. Consider the four points labeled on the diagram. Describe each point in terms of its attainability and desirability. Is there one "best" point for the economy to produce at this time?

      2. (4 points)
      Point A, B, and D are all attainable.  Point C is not attainable given current resources and techology.
      Point A is not desirable because it is inside the PPC and thus Mexico is not using all of its resources.
      Points B and D are on the PPC, both efficient.  Which one is better depends on Mexicos preferences for sweaters vs. oranges.
       
    2. Suppose a Presidential candidate in Mexico promises to bring production to point C. Explain why this is a problem? What is necessary to get to point C?
      (4 points)
      Point C is not attainable given current resources and techology, so the candidate is making promises that he/she cannot keep.  Point C will only become possible with significant economic growth.
  2. Consider the plight of North Korea as described in Chapter 1 (pages 9 and 10).
    1. What is the central scarcity issue in the North Korean economy? How did they end up at a point on their PPC that causes widespread famine? (think about who decides what, how, for whom to produce)

      2. (4 points)
      N. Korea has chosen military buildup over an adequate food supply.  N. Korea is a command economy, where the dictatorship has chosen to devote resources to the military even though this mean famine for much of the population.  Markets and consumer demand for food played no role in deciding what to produce or who gets it.
       
    2. The U.S. has both a large military and an abundant food supply. Why the difference from North Korea?

      3. (4 points)
      The U.S. has more resources to begin with, so our PPC is way to the right of N. Korea's.  Also, in the U.S., as a mixed economy, markets help allocate resources, which ensures that resources are allocated to food production.
  3. Consider the following markets below. For each market, SHOW AND EXPLAIN the changes that occur from the event listed.
    1. The market for corn oil: Droughts in the Midwest devastate the corn crop.

      2. 3 points
      The supply curve for corn oil shifts to the left due to increases in the cost of their main input, corn.  The price of corn oil rises and the quantity falls.
       
    2. The market for turkey: Fertility drugs increase turkey births, and health conscious Americans eat low fat diets.

      3. 3 points
      Both supply and demand increase, or shift right.  Quantity rises, but the total effect on price is uncertain.
       
    3. The market for Jeeps: The price of gasoline rises 25% in 3 months.
3 points
Gas is a compliment to Jeeps.  The demand for Jeeps falls as consumers substitute more fuel efficient vehicles.  Demand shifts left, and price and quantity fall.