Assignment 1

Due: Sep. 23th, 2019 at 4pm

1. Classify each of the following statements as positive or normative. Explain.
a. An increase in inflation temporarily reduces unemployment.
b. The government should increase the rate of inflation in order to reduce the unemployment
rate.
c. The government should increases taxes to pay for universal health care.
d. An increase in taxes causes people to work fewer hours.
e. The price of a new car is too high.
2. Imagine a society that produces military goods and consumer goods, which we’ll call “guns”
and “butter.”
a. Draw a production possibilities frontier for guns and butter. Using the concept of
opportunity cost, explain why it most likely has a bowed-out shape.
b. Show a point that is impossible for the economy to achieve. Show a point that is feasible
but inefficient.
c. Imagine that the society has two political parties, called the Hawks (who want a strong
military) and the Doves (who want a smaller military). Show a point on your production
possibilities frontier that the Hawks might choose and a point the Doves might choose.
d. Imagine that an aggressive neighboring country reduces the size of its military. As a result,
both the Hawks and the Doves reduce their desired production of guns by the same amount.
Which party would get the bigger “peace dividend”, measured by the increase in butter
production? Explain.
3. Suppose that there are 10 million workers in Canada and that each of these workers can produce
either 2 cars or 30 bushels of wheat in a year.
a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of
producing a bushels of wheat in Canada? Explain the relationship between the opportunity
costs of the two goods.
b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million
cars, how much wheat can it consume without trade? Label this point on the production
possibilities frontier.
c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange
for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much
wheat does this deal allow Canada to consume? Label this point on your diagram. Should
Canada accept the deal?
4. Consider the markets for DVDs, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
1) DVDs and TV screens
2) DVDs and movie tickets
3) TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a
diagram to show what happens in the market for TV screens
c. Draw two more diagrams to show how the change in the market for TV screens affects the
market for DVDs and movie tickets.