Economics 230 J. F. O’Connor
Exercises for Chapter II
1. A farmer has 200 acres of land which can be used for growing wheat or barley. Each acre yields one ton of wheat or .75 ton of barley. Construct the Production Possibilities Frontier (PPF) in both tabular and graphic form.
a. Does the opportunity cost of wheat increase, decrease or remain constant as more wheat is produced? How do you know?
b. What does the PPF tell you about how the yield of wheat changes as more land is devoted to wheat?
c. Indicate two points on the diagram where the farmer is operating efficiently. Compare these two points.
d. Indicate the inefficient or wasteful production combinations.
e. What is the interpretation of points outside the frontier?
f. How would the production possibilities curve shift if a yield of wheat per acre fell to .5 ton per acre?
2. A farmer has 50 acres of land that can be used for growing barley or wheat. The production possibilities are as follows.
a. Does the opportunity cost of barley increase, decrease or remain constant as more barley are produced? How do you know? ( Compute the OC for different amounts of barley)
b. Does the PPF indicate that some parts of the farmer’s land are more productive for growing barley than other parts? Explain!
c. Indicate the efficient combinations of barley and wheat.
d. Indicate the inefficient (or wasteful) production combinations.
e. What is the interpretation of points outside the frontier?
f. If market price of barley is 2.5 times that of wheat, what combination of wheat and barley will the farmer produce? Explain!
g. Sketch a PPF for the case where the yield of barley per acre has increased.
h. Sketch a PPF for the case where the farmer acquires additional land of similar quality.
3. A farmer has 50 acres of land that can be used for growing green peppers or cucumbers. He has 25 acres where the yield is two tons of green peppers or cucumbers while the remaining the yield in the other 25 acres is one ton of green peppers or two tons of cucumbers. The production possibilities are as follows.
a. Does the opportunity cost of green peppers increase, decrease or remain constant as more green peppers is produced? How do you know?
b. Does the PPF Incorporate the Principle of Increasing Opportunity Cost (Low Hanging Fruit Principle) ? Explain!
c. Indicate the efficient combinations of green peppers and cucumbers.
d. If market price of green peppers is 2.5 times that of cucumbers, which combination of cucumbers and green peppers will the farmer produce? Explain!
e. Suppose that a technological advance resulted in the yield of green peppers increasing to two tons per acre on the second 25 acres. Draw the new PPF.
f. Sketch a PPF for the case where the farmer acquires additional land
4. W&J Furniture can use its resources to produce desks or tables. The Production Possibilities Frontier is shown in the following table and graph.
a. How does the opportunity cost of desks change as more desks are produced? (Be precise!) How do you know?
b. Explain how the Low Hanging Fruit Principle explains the shape of the PPF.
c. Indicate the points on the diagram where the joinery is operating efficiently. Compare two of the points.
d. Indicate the inefficient or wasteful production combinations.
e. What is the interpretation of points outside the frontier?
f. How would the production possibilities curve shift if a new and improved method of producing desks were introduced?
5. The J&J Company operate a joinery in which they make desks and tables. They face the following Production Possibilities Frontier.
a. How does scarcity manifest itself in the above PPF?
b. What is the opportunity cost of a desk when producing: i) between 0 and 40 desks? ii) between 40 and 60 desks? iii) between 60 and 80 desks? iv) between 80 and 100 desks?
c. Does the opportunity cost of a desk increase, decrease or remain constant as the number of desks produced increases? How do you know?
d. Discuss how the Low Hanging Fruit Principle explains the shape of the PPF?
e. Indicate the efficient combinations of desks and tables.
f. Indicate the inefficient or wasteful combinations of desks and tables.
g. What is the interpretation of points outside the frontier?
h If desks sell for 1.5 times tables, what combination of desks and tables will J&J produce? Explain!
i. Sketch a PPF for the case where J&J have found a more effective method for producing tables.
j. Sketch a PPF for the case where J&J have a larger plant.
6. Student Jones has ten hours available for studying two subjects in which Jones is going to have tests next week. Jones believes that the relationship between hours spent studying and the score obtained is as follows.
Hours of Economics Biology
Study Expected Expected
Score Score
0 0 0
1 30 30
2 50 50
3 65 65
4 75 75
5 84 84
6 90 90
7 94 94
8 97 97
9 99 99
10 100 100
a. Construct a Production Possibilities Table when the total hours available for study is 10 by finding the maximum attainable expected score in Biology corresponding to each score in Economics.
Economics Biology
Expected Expected
Score Score
0 __________
30 __________
50 __________
65 __________
75 __________
84 __________
90 __________
94 __________
97 __________
99 __________
100 __________
b. Plot the Production Possibilities Frontier. Place the expected score in Economics on the horizontal axis.
c. Can Jones achieve a grade of A in both courses? Explain!
d. If Jones wants to get an "A" in economics, what is the best score that she can achieve in biology?
e. What is the opportunity cost of increasing Jones's score in economics from 65 to 75? In what units is opportunity cost measured?
f. Does the Production Possibilities Frontier display increasing opportunity cost? Explain what this means and why it is or is not true in this problem.
g. If Jones wants to maximize the sum of the expected scores, what combination should she choose? Is this a reasonable criterion for decision making in this problem? Would maximizing the sum of the amount of soybeans and corn, in the example from class, be a reasonable criterion? Explain your reasoning.
h. Plot the Production Possibilities Frontier for the case where Jones has a total only 8 hours available for study. ( Draw up the PP table and then plot the PPF.)
i. What is the best the student can do in terms of scores in the two subjects? Discuss.
7. Student Chen has only 12 hours available for studying Biology and Economics, two subjects in which he has exams next week. Given Chen’s capabilities in the two subjects, the Production Possibilities Frontier facing him is as follows.
a. How does scarcity manifest itself in the above PPF?
b. For scores between 60 and 70 in economics, what is the opportunity cost of a point in economics? For scores between 70 and 90? For scores between 90 and 95?
c. Does the opportunity cost of a point in economics increase, decrease or remain constant as the number of points in economics increases? How do you know?
d. What does the shape of the PPF indicate about how the marginal benefit of studying economics changes as Chen spends more time studying economics? Explain!
e. Indicate the efficient combinations of scores in economics and biology.
f. Indicate the inefficient or wasteful combinations of scores.
g. What is the interpretation of points outside the frontier?
h If the letter grades are standard A, B, C, D, and Chen values a grade in economics more highly than his grades in other subjects, what combination will he choose? Explain!
i. Sketch a PPF for the case where Chen has found a more effective method for studying economics.
j. Sketch a PPF for the case where Chen spends 10 hours studying.
8. A farmer has 40 acres of land which can be used for growing blueberries or strawberries. The production possibilities are as follows.
a. Does the opportunity cost of blueberries increase, decrease or remain constant as more blueberries are produced? How do you know?
b. Indicate two points on the diagram where the farmer is operating efficiently. Compare these two points.
c. Indicate the inefficient or wasteful production combinations.
d. What is the interpretation of points outside the frontier?
e. How would the production possibilities curve shift if a new and improved variety of blueberries were introduced?
9. Johnson Joinery produces desks and chairs and so does Wilson Joinery. The Production Possibilities Frontier for Johnson is (0 desks, 40 tables) , (80 desks , 0 tables) and linear combinations in between. The PPF for Wilson is (0 desks, 60 tables), (20 desks, 0 tables), and linear combinations in between
At present, Johnson produces 40 desks and 20 tables while Wilson produces 10 desks and 30 tables. Johnson and Wilson are wondering if the could increase their joint output of both desks and chairs by rearranging their individual outputs?
a. Is each joinery currently producing on its own PPF?
b. Construct the joint PPF
c. Identify the output combinations that are better than the current joint output of (50 desks, 50 tables)
d. If the market price of tables is the same as the market price of desks what is the best combination for joint production?
10. Only two goods are produced in the world's two countries, Japan and Taiwan. In Japan, one worker can produce 5 pairs of shoes or 5 electronic calculators. In Taiwan, one worker can produce 4 pairs of shoes or 2 calculators.
a. In the absence of trade, what is the opportunity cost i) of Japanese shoes, ii) of Taiwanese shoes, iii) of Japanese calculators, iv) of Taiwanese calculators?
b. Assuming each country has the same number of workers, draw the production possibility curves for each country.
c. Which country has the absolute advantage in the production of each good? The comparative advantage?
d. Suppose trade is opened up between the two countries. What is the range of price for calculators in the single international market?
e. Show how comparative advantage would be changed if a Japanese worker could produce
i) 7.5 pairs of shoes
ii) 12.5 pairs of shoes
11. Only two goods are produced in the world's two countries, the U.S. and Mexico. In the U.S., one worker can produce 30 units of oil or 30 electronic calculators. In Mexico, one worker can produce 20 units of oil or 10 calculators.
a. In the absence of trade, what is the opportunity cost 1) of U.S. calculators, 2) of Mexican calculators?
b. Assuming each country has the same number of workers, draw the production possibility curves for each country, on separate diagrams.
c. Which country has the absolute advantage in the production of each good? The comparative advantage?
d. Suppose trade is opened up between the two countries. What is a range of the price of calculators?
e. What will be the pattern of trade between U.S. and Mexico?
12. Only two goods are produced in the world's two countries, the U.S. and Mexico. In the U.S., one worker can produce 20 units of oil or 40 electronic calculators. In Mexico, one worker can produce 10 units of oil or 10 calculators.
a. In the absence of trade, what is the opportunity cost 1) of U.S. calculators, 2) of Mexican calculators?
b. Assuming each country has the same number of workers, draw the production possibility curves for each country, on separate diagrams.
c. Which country has the absolute advantage in the production of each good? The comparative advantage?
d. Suppose trade is opened up between the two countries. What is a range of the price of calculators?
e. What will be the pattern of trade between U.S. and Mexico?
13. Explain the difference between comparative advantage and absolute advantage by means of an example. Which is important in determining the pattern of specialization. Why?
14. President Clinton said in his address to Congress that it is possible to increase the quantity of health care provided without increasing expenditure on health care, that is, without reducing the amounts of other goods that we consume. Use the following production possibility curve to assess the validity of his argument. Consider the case where the current system is efficient and the case where it is not.
15. Only two goods are produced in the world's two states, Iowa and Oklahoma. Suppose that the following is the case. In Iowa, 1 acre can produce 50 bushels of wheat or 100 bushels of corn. In Oklahoma, 1 acre can produce 10 bushels of wheat or 50 bushels of corn.
a. In the absence of trade, what is the opportunity cost i) wheat in Iowa, ii) of wheat in Oklahoma, iii) corn in Iowa, iv) corn in Oklahoma?
b. Assuming each state has the same amount of land (for example, 1 acre), draw the production possibility curves for each state.
c. Which state has the absolute advantage in the production of each good? The comparative advantage?
d. Suppose trade is opened up between the two regions. What is the range of price for wheat in the single international market?
e. Assuming each has an acre of land, show the PPF for the two states combined.
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