Economic Problem Solving

ECONOMIC PROBLEM SOLVING 10

EconomicProblem Solving

ProblemA

Q1

Thereare four basic assumptions underlying the production possibilityfrontier resources should be utilized in producing one or both ofonly two commodities, technology as well the production techniques donot change, resources are used in a technically efficient manner, andquantities of resources do not change (Tucker,2011).

Q2

Atpoint C, it is possible to produce either 2 units of butter or 12units of guns. This implies that the opportunity cost of producingone unit of butter is six units of guns. It takes more time andresources to make one unit of butter. At this point, the opportunitycost of producing more butter would be producing less and less unitsof guns. Producing more guns would imply producing less units ofbutter. The law of increasing opportunity cost is reflected in theshape of the production possibility curve since as one commodity isproduced instead of another, the opportunity cost increases.

Q3

Incase the hypothetical economy were producing only 1unit of butter and10 units of guns, then the resource of this economy would beunderutilized. This is because there is an alternative within theproduction possibility indicating that it is possible to produce 1unit of butter and 14 units of guns.

Q4

Theeconomy cannot produce outside its current production possibilitiessince the resources available can only produce these possibilities.Changes in technology would affect the production possibilities curvesince it can lead to the curve shifting to the left or right.International trade can permit consumption above its productionpossibilities curve through adding more resources to the economy,changing the labor force, using advanced technology, or training thework force. All these would lead to increased productionpossibilities, which would allow increased consumption.

ProblemB

Q1

Adecrease in supply, while demand remains constant would result indecreasing in equilibrium quantity and an increase in equilibriumprice.

Price D S1

S

P2

P1

S1

S

Q2Q1 Quantity

Adecrease in supply would result to a leftward shift in the supplycurve, leading to a new equilibrium marked by price P2 and quantityQ2.

Q2

Adecrease in demand, while supply remains constant would result to adecrease in the equilibrium levels of price and quantity. This isbecause a decrease in demand would shift the demand curve to theleft.

S

P1

P2

D

Q2 Q1 D1

Q3

Anincrease in supply while demand remains constant would result in alower equilibrium price and a higher equilibrium quantity. This isbecause an increase in supply would lead to supply curve shifting tothe right. S S1

Price

P1

P2

Q1 Q2 D

Quantity

Q4

Anincrease in supply and an increase in demand would lead to higherlevels of equilibrium price and quantity. This is because an increasein supply would result in rightward shift of the supply curve and anincrease in demand would result to a rightward shift in the demandcurve. Thus, new equilibrium would be at a higher level.

SS1

P2

P1

D1

D

Q1 Q2

Q5

Anincrease in demand while supply remains constant would result inhigher equilibrium levels of price and quantity. This is because anincrease in demand would lead to a shift in demand curve to theright, setting equilibrium price and quantity at higher levels.

S

P2

P1

D D1

Q1 Q2

Q6

Anincrease in supply and a decrease in demand would result to adecrease in the equilibrium price however, when it comes toequilibrium quantity, it would depend with the level of demanddecrease. Decrease of supply by a small amount would lead to a lowerequilibrium quantity, while decrease of supply by a large amountwould lead to a higher equilibrium quantity level.D S

Price S1

P1

P2

D1

Q2Q1Quantity

Q7

Anincrease in demand and a decrease in supply would result to a higherequilibrium price, but the equilibrium quantity may be higher orlower depending with the amount by which demand and supply changes.

D D1 S1

S

P2

P1

Q1Q2 Quantity

Q8

Adecrease in both supply and demand would result in a lowerequilibrium quantity however, the new equilibrium price would dependon the amount by which the demand and supply decrease.

S1

S

P

D1 D

Q2Q1

ProblemC

Q1

Atequilibrium, Qd = Qs therefore, the equilibrium price is 3 units andthe market equilibrium quantity of bushels demanded ad supplied is 12units.

Q2

Ata price of $2, there would be a shortage of 13 million bushels. Only2 million bushels would be sold that year since this is the onlyamount supplied to the market.

Q3

Atthe price of $4, there would be a surplus of 6 million bushels ofwheat.

References

Tucker,I. B. (2011).&nbspMacroeconomicsfor today.Mason, OH: South-Western Cengage Learning.