Macroeconomics

Assignment 1

This assignment consists of a set of problems or narrative response questions based on the major topics covered in the course. Each question identifies the chapter from which it is drawn, and the topic to which it relates. Provide a complete response to each component of each question and where required – and even where not explicitly required - explain your thought process for justifying given answers. A justification for any response will earn some credit.

Chapter 1: Production Possibilities Frontier

A production possibilities table for two products, corn and paper, is found below. Usual assumptions regarding production possibilities are implied. Corn is measured in tons, and paper is measured per unit.

Combination Corn Paper

A 0 6

B 18 5

C 33 4

D 45 3

E 54 2

F 60 1

G 63 0

a. Construct a production possibilities curve from this information placing corn on the vertical axis and paper on the horizontal axis (You can either construct a clearly labeled rough graph using Word’s drawing tool or create a graph using Excel).

b. What is the marginal opportunity cost of producing the first unit of paper? The first unit of paper would cost 3 tons of corn.

The marginal opportunity cost of producing the fourth unit of paper? The fourth unit of paper would cost another 12 tons of corn.

Chapter 2: Production and Efficiency

Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $50 worth of product X. Each of these techniques shown in the following table will produce exactly $50 worth of X.

Unit resource

prices Method #1 Method #2 Method #3

Land $4 4 2 1

Labor 3 4 3 6

Capital 2 3 4 3

Entrepreneurship 1 3 6 4

a. Which method is most efficient? Why?

b. Given the above prices, will the firm adopt a new method which involves 2 units of land, 2 of labor, 4 of capital, and 8 of entrepreneurial ability?

c. Suppose the price of labor falls to $1 without any other...