Problem Set 1
Answer the follow questions. Show all of your calculations and label all parts of a graph.
1. There is an economy that produces two good: vacuums and toasters
a) Draw the production possibilities frontier for vacuums and toasters.
b) Show a point F that is feasible but inefficient. Show a point G that is impossible to achieve. Show a point H that is both feasible and efficient.
c) At point C, what is the opportunity cost of producing 40 more vacuums’s?
d) What is the opportunity cost of moving production levels from point D to B?
e) Is there evidence of the Law of Diminishing Returns? How can you tell?
2. The market for milkshakes has the following demand and supply schedule:
a. Graph the demand and supply curve. What is the equilibrium price and quantity?
b. The government sets a price floor at $3.00, will we have a surplus or shortage? Of how much?
c. If the price of a milkshake rises from $2.00 to $2.50, calculate the price elasticity of demand. What does this elasticity mean?
d. A deadly virus kills a large population of cows, what may happen in the market for milkshakes? Show graphically and explain.