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Economics 102 Professor McClelland

Fall 2007

Problem Set #1

DUE MONDAY, SEPT. 10, IN LECTURE, URIS G-01

Problem sets are to be turned in AT THE BEGINNING OF THE LECTURE.Boxes will be provided at the backof Uris G-01.

Place your problem set answers in the box with your TAs name and section on it.

NO CREDIT WILL BE GIVEN FOR LATE PROBLEM SETS .

1. Which of the following implies unequivocally the law of diminishing returns?

a) As all inputs are doubled, output less than doubles.

b) As one input is doubled, output more than doubles.c) As one input is doubled, output less than doubles.

d) As all inputs are doubled, output more than doubles.

e) Both (a) and (d).

f) Both (b) and (c).

2. These following data reflect three possible combinations of corn and rice that can be

produced by using a given set of resources; that is, three different points on theproduction possibilities frontier are:

(thousands of bushels)

Corn 0 50 X

Rice 100 50 0

If the PPF has its usual bowed-out shape, X will be:

a. 100.

b. More than 100.c. Less than 100.

d. 150.

e. Cannot be determined from the data.

OVER

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Economics 102 Problem set #1

3. Which one of the following is NOT a necessary assumption underlying the

Production Possibility Frontier (PPF)?

a) inputs are used efficiently.

b) all prices remain unchanged.

c) capital stock is fixed.d) labor force is fixed.

4. The population of an isolated island consists of 10 people. In one year, each person

can either pick 100 bunches of bananas, or, alternatively, tend an oven that bakesbananas into banana bread. There is only one oven in the island and that has a

capacity of producing 100 loaves of banana bread per year. This one oven on theisland can be either fully utilized (producing 100 loaves of banana bread per

year) or not used at all. One person is needed to tend the oven. To produce 100loaves of banana bread the oven requires 100 bunches of bananas.

a. What does the production possibilities frontier (bananas versus banana bread) for

the island look like? (Put banana bread on the horizontal axis.)

b. What is the opportunity cost of producing 100 loaves of banana bread?

c. The natives of the island discover a second oven that has the same capacity as the

first oven. Now what does the production possibilities frontier for the island look

like?

d. Depict the possible consequence of each of the following on the islands PPF

curve.

(i) A new technology is discovered that allows 100 loaves of banana bread to bebaked with only 50 bunches of bananas in each of the two ovens.

(ii) A severe hurricane strikes the island, destroying all the banana trees.

(iii) A magician migrates to the island with the capacity to convert every bunch ofbananas into a loaf of banana bread.

Note: Answers should be written on a separate sheet of paper, not on the problem set

itself.