Micro Economics

1. Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts):
Production Alternatives
Type of production A B C D E
Automobiles 0 2 4 6 8
Forklifts 30 27 21 12 0
(a) Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
(b) If the economy is at pont C, what is the cost of one more automobile? of one more forklift? Explain how the production possibilities curve reflects the law of increasing opportunity costs.
(c) If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 forklifts, what could you conclude about its use of its available resources?
(d) What would production at a point outside the production possibilities curve indicate? What must occur before the economy can attain such a level of production?
2. What is an opportunity cost? How does the idea relate to the definition of economics? Which of the following decisions would entail the greatest opportunity cost: Allocating a square block in the heart of Toronto for a surface parking lot or allocating a square block at the edge of a typical suburb for such a lot? Explain.
3. With current technology, suppose a firm is producing 400 loaves of banana daily. Also assume that the least cost combination of resources in producing those loaves is 5 units of labour, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 400 loaves at $2 per unit, will it continue to produce banana bread? If this firm’s situation is typical for the other makers of banana bread, will factors of production flow to or away from this bakery good?
4. How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market, i.e., do price and quantity rise, fall or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Please discuss, giving examples as necessary.
(a) Supply decreases and demand is constant
(b) Demand decreases and supply is constant
(c) Supply increases and demand is constant
(d) Demand increases and supply increases
(e) Demand increases and supply is constant
(f) Supply increases and demand decreases
(g) Demand increases and supply decreases
(h) demand decreases and supply decreases

5. How would the following changes in price affect “total revenue”, i.e., will it increase, decrease or remain unchanged? Please explain why.
– price falls and demand is inelastic
– price rises and supply is elastic
– price rises and supply is inelastic
– price rises and demand is inelastic
– price falls and demand is elastic
– price falls and demand is unit elastic
6. Why is it desirable for price ceilings to be accompanied by government rationing? Why is it desirable for price floors to be accompanied by programs that purchase surpluses, restrict output, or increase demand? Show graphically why price ceilings produce shortages and price floors produce cause surpleses.
7. Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is – 5.4. What can you conclude about how products A and B are related? products C and D?

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