Individual Assignment 1 (1) PDF

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Individual Assignment 1 1. An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can either mow two lawns or wash one car. a. Calculate how much of each service is produced in the following scenarios, which we label A, B, C, and D: • All three spend all their time mowing lawns. (A)  ( 1+1+2) x 10 = 40 • All three spend all their time washing cars. (B)  ( 1+2+1) x 10 = 40 • All three spend half their time on each activity. (C)  Mowing lawns: ( 1+1+2) x 5 = 20 Washing cars: ( 1+2+1) x 5 = 20 • Larry spends half his time on each activity, while Moe only washes cars and Curly only mows lawns. (D)  Mowing lawns: (1 x 5 ) + ( 2 x 10 ) = 25 Washing cars:  (1 x 5 ) + ( 2 x 10 ) = 25 b. Graph the production possibilities frontier for this economy. Using your answers to part a, identify points A, B, C,and D on your graph. A Mowing lawns 40 Washing cars 0

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B 0 40

C 20 20

D 25 25

Quantity of moving lawns

40

A production possibilities frontier

25 20

D C B

0

20 25

40

Quantity of washing cars

c. Explain why the production possibilities frontier has the shape it does. In case A, in 10 hours all three people will cut 40 lawns and 0 wash the car. In case B, in 10 hours all three people will cut 0 lawns and wash 40 cars. In case C, in 10 hours all three people will cut 20 lawns and wash 20 cars. In case D, in 10 hours all three people will cut 25 lawns and wash 25 cars. So connecting all the cases we see that the production possibilities frontier passes through the points A, B, C  Looking at the chart, we can see that the production capacity limit of this company is that in 10 hours, it can do a maximum of 25 cars and cut 25 lawns.

d. Are any of the allocations calculated in part a inefficient? Explain. Instance D is calculated inefficiently because the production possibility limit has been exceeded. While the maximum 10 hours the company can only cut 20 lawns and wash 20 cars, but case D has crossed the limit of cutting 25 lawns and washing 25 cars. Therefore, it will cause production inefficiencies

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2. Suppose the demand curve and supply curve for FPT sweatshirts is given by: Price ($)

10 20 30 40 50 60

Quantity Demanded per year 4000 3200 2400 1600 800 0

D’

Quantity Supplied per year

S’

5200 4400 3600 2800 2000 1200

400 800 1200 1600 2000 2400

1600 2000 2400 2800 3200 3600

a. Draw the demand and supply curves.

b. At what price does equilibrium occur? What quantity is traded at that price? At this equilibrium, how much dollars in total is spent on FPT sweatshirts? PE = 40$ QE=1600 Total is spent on FPT sweatshirts : P x Q = 40 x 1600 = 64000($) c. Suppose the price of cotton (a production input for sweatshirts) falls such that at each price, quantity supplied changes by 1200 units. Complete the column labeled S'. Graph the new supply curve. Label it S'. The decrease in cotton prices resulted in an increase in the quantity supplied by 1200 units. 3

d. What is the new equilibrium price? quantity? At this equilibrium, how much in total is spent dollars on FPT sweatshirts? PE’=30$ QE’=2400 Total is spent dollars on FPT sweatshirts= P x Q = 30 x 2400 = 72000($) e. Starting with the original demand and supply figures, suppose that the price of sweatpants ( a compliment consumption good to sweatshirts) falls. As a result, the quantity of FPT sweatshirts demanded changes by 1200 at each price. Complete column D'. Graph the new demand curve. Label it D'. The decrease in the price of sweatpants led to an increase in demand for sweatshirts by 1200 units.

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f. What is the new equilibrium price? quantity?. At this equilibrium, how much dollars in total is spent on FPT sweatshirts? PE”=50$ QE”=2000 Total is spent on FPT sweatshirts: P x Q = 100000($) 3. In each of the following cases, do you think the price elasticity of supply is (i) perfectly elastic; (ii) perfectly inelastic; (iii) elastic, but not perfectly elastic; or (iv) inelastic, but not perfectly inelastic? Explain using a diagram. a. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2.  Perfectly inelastic of supply

Because prices increase with demand this summer for luxury cruises, but remain unchanged in the number of cabins. That's why the supply curve is vertical.

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b. The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand.  Perfectly elastic of supply:Because stay at that price regardless of whether

the demand is high or not, the supply curve is flat.

c. Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month.

Inelastic of supply :

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The drop in ticket prices causes the supply to decrease because it cannot provide as much with the given amount as that would cause a loss.  so the supply path will be less than 1

d.Owners of vacation homes in Miami rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

Elasticity of supply: When price falls by 30%, the quantity supplied falls by more than 50%. The price elasticity of supply is greater than 50%/30%=1.67, so the price elasticity of supply is greater than 1.67.

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This is the end of my assignment 1. Thank you teacher for reading it.

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