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Question 1 The Amish are well known for their ability to produce high quality furniture. But they also excel at producing all natural butter and eggs. Consider the following production possibilities table Butter
Question Econ 104 ? Homework 1 Due: Friday September 11. IN CLASS Name: ______________________________________________ Access ID: _________________@psu.edu Your answers MUST be typed in the space provided. Add additional space as required. If asked to draw a graph you may draw the graph by hand after typing up and printing the assignment. Any hand drawn graphs must be contained within this assignment and not included on separate pieces of paper. 1. If you do not type your answers you will incur an immediate 50% PENALTY on the assignment. 2. Staple your homework. Paperclips folded corners or alligator clips etc. will incur an immediate 20% PENALTY. Question 1 The Amish are well known for their ability to produce high quality furniture. But they also excel at producing all natural butter and eggs. Consider the following production possibilities table Butter (pounds) Eggs 120 0 90 120 60 240 30 360 0 480 A) Draw the production possibilities frontier based on the data in the above table. B) What is the opportunity cost of one pound of butter? How can you tell? C) What is the opportunity cost of an egg? How can you tell? Question 2 In recent times financial markets across the world have become increasingly worried about recession in China. Investors are afraid that a global recession could be on the horizon. As a result investors have begun to increase their holdings of gold as it is seen as a safe investment. Consider the market below for the following questions. A) Correctly indicate the direction of the demand curve shift labeling the demand curves in the above graph D1 and D2. B) What equation describes the Supply curve? ? i.e. P=mQ+b (Hint: b<0) C) Imagine that China?s economy improves and worries of recession subside. Once this happens investors begin to realize that gold prices will likely drop in the future. 1. How and why will this realization affect the SUPPLY of gold? 2. Explain what would happen to the equilibrium price and quantity? You may provide a graph if you wish. Question 3 Australia and New Zealand are both highly regarded for their abilities to produce kiwis (K) and bauxite (B). The production possibility frontier for New Zealand is described by the equation and the production possibilities frontier for Australia is given by the equation A) Draw the PPFs of both Australia and New Zealand below. They must be on the same graph. Label all intercepts. B) Does either country have an absolute advantage in the production of both goods? Explain. C) Which country has the comparative advantage in the production of kiwis? What about bauxite? How can you tell? D) Suppose Australia specializes in producing bauxite and New Zealand specializes in producing kiwis. Would the two countries trade if the exchange rate were 20 kiwis for every 1 ton of bauxite (20K:1B)? Who would benefit more? Demonstrate and explain.
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