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BB 107 Group Assignment

Due Date: Oct 16 2018

Answer All Five Questions. Each question carries 20 marks.

1. Explain how (if at all) each of the following events affects the location of a country’s
production possibilities curve:

i. The quality of education increases. (4 marks)

ii. major industries in the country has reduced labor force by 30%. (4 marks)

iii. A new technology has greatly improved the manufacturing production process. (4 marks)

iv. Given the diagrams below explain both the US and china growth pattern in the future.
(8 marks)

United States China

Futu re
Futu re Goo ds
Goo ds

B
A
Present Presen t
Goods Goods

[Total: 20 marks]

2. Suppose that the demand and supply schedules for rental apartments in the city of
Gotham are as given in the table below.

a. What is the market equilibrium rental price per month and the market equilibrium
number of apartments demanded and supplied? (5 marks)
 2

b. If the local government can enforce a rent-control law that sets the maximum monthly
rent at $1500, will there be a surplus or a shortage? Of how many units? And how many
units will actually be rented each month? (5 marks)

c. Suppose that a new government is elected that wants to keep out the poor. It declares
that the minimum rent that can be charged is $2500 per month. If the government can
enforce that price floor, will there be a surplus or a shortage? Of how many units? And how
many units will actually be rented each month? (5 marks)

d. Suppose that the government wishes to decrease the market equilibrium monthly rent by
increasing the supply of housing. Assuming that demand remains unchanged, by how many
units of housing would the government have to increase the supply of housing in order to
get the market equilibrium rental price to fall to $1500 per month? (5 marks)
[Total 20 marks]

3. Suppose you won $15 on a lottery ticket and decided to spend all the winnings on candy
bars and bags of peanuts. The price of candy bars is $.75 and the price of peanuts is $1.50.

a. Construct a table showing the alternative combinations of the two products that are
available. (5 marks)

b. Plot the data in your table as a budget line in a graph. What is the slope of the budget
line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do
these opportunity costs rise, fall, or remain constant as each additional unit of the product is
purchased? (6 marks)

c. Does the budget line tell you which of the available combinations of candy bars and bags
of peanuts to buy? (4marks)

d. Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line in your
diagram. Has the number of available combinations increased or decreased? (5 marks)
[Total: 20 marks]

4. A firm has fixed costs of $60 and variable costs as indicated in the table below. Complete
the table:
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a. Fill in the empty columns. (6 marks)

b. Graph total fixed cost, total variable cost, and total cost. Explain why the slope of TC is
flat and then became steep. (9 marks).
c. Explain how the location of each curve graphed in question 4(b) would be altered if
total fixed cost had been $40 rather than $60 (5 marks)
[Total 20 marks]

5. Karen runs a print shop that makes posters for large companies. It is a very competitive
business. The market price is currently $1 per poster. She has fixed costs of $250. Her
variable costs are $1500 for the first thousand posters, $1200 for the second thousand, and
then $800 for each additional thousand posters.

a. What is her AFC per poster (not per thousand!) if she prints 1000 posters? 2000? 10,000?
(5 marks)

b. What is her AVC per poster if she prints 1000? 2000? 10,000? (5 marks)

c. What is her ATC per poster if she prints 1000? 2000? 10,000? (5 marks)

d. If the market price fell to 75 cents per poster, would there be any output level at which
Karen would not shut down production immediately (assuming maximum production at
10,000 posters) ? (5 marks) [Total: 20 marks]