Additional Practice Questions for Midterm 1

1) Production Possibility Frontier (ppf)

a) What economic concept does the ppf display? How is this related to the negative slope of the ppf curve?

b) Refer to figure above. Which point(s) represents underemployment of resources for both ppfs?

c) Which point(s) is unattainable given resources and technology for both ppfs?

d) Which point(s) are unattainable for ppf0, but not ppf1?

e) Which point(s) are unattainable for ppf1, but not ppf0?

f) What sort of things would allow an economy to go from ppf0 to ppf1? Does this change the fact that we have increasing opportunity costs with ppf0?

2) Demand and Supply Curves

a) Think about what happens to equilibrium price and quantity when both the supply and demand curve shift.

EX 1: Demand increases and supply increases
EX 2: Demand increases and supply decreases
EX 3: Demand decreases and supply increases
EX 4: Demand decreases and supply decreases

b) Remember that a price floor (Examples: 1) price support programs for farmers or 2) a minimum wage) needs to be above the equilibrium price in the market to be effective. What happens if it is below the equilibrium market price?

c) Likewise, a price ceiling (Example: Rent Control) needs to be below the equilibrium price in the market to be effective. What happens if it is above the equilibrium market price?

3) Elasticities

KNOW HOW TO CALCULATE ELASTICITIES !!!

a) Suppose you are given 2 points on a curve

POINT A: Price=100, Quantity=8
POINT B: Price=50, Quantity=12

Is this a supply curve or a demand curve?

Calculate the elasticity from point A to point B. Is this interval elastic or inelastic?

Calculate the elasticity from point B to point A. Is this interval elastic or inelastic?

b) Suppose you are given 2 points on a curve

POINT C: Price=80, Quantity=20
POINT D: Price=100, Quantity=30

Is this a supply curve or a demand curve?

Calculate the elasticity from point C to point D. Is this interval elastic or inelastic?

Calculate the elasticity from point D to point C. Is this interval elastic or inelastic?

4) Budget Constraints

a) Draw the budget constraint of a consumer that will make consumption choices between two goods, beer and pepsi, has income of $10, and faces prices of $1 for beer and $0.50 for pepsi.

Redraw the budget constraint when the price of pepsi goes down to $0.40.

Is the drop in the price of pepsi a good thing for the consumer. How is this reflected in the new budget constraint?