Problem Solving

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Problem 1

Bill can produce either tables or chairs. Bill can work up to 10 hours a day. His production possibilities are given in the table below:

Tables Chairs
0 100
10 80
20 60
30 40
40 20
50 0
  • Construct the production possibilities frontier (PPF) for Bill. Put tables on the Horizontal axis and chairs on the vertical axis.
  • What is Bill’s opportunity cost of producing one additional table?
  • What is Bill’s opportunity cost of producing one additional chair?
  • Currently Bill is producing 20 tables and 40 chairs.
  • Is this allocation of resources efficient? Why?
  • Show this allocation on the graph and advise Bill how he can be more efficient.

Problem 2

Suppose the market for corn is given by the following equations for supply and demand:

QS = 2p − 2

QD = 13 − p

where Q is the quantity in millions of bushels per year and p is the price.

  • Calculate the equilibrium price and quantity.
  • Sketch the supply and demand curves on a graph indicating the equilibrium quantity and price.
  • Calculate the price-elasticity of demand and supply at the equilibrium price/quantity.
  • The government judges the market price is under expectations and announces a price floor equal to $7 per bushel.
  • Would there be a surplus or a shortage?
  • What would be the quantity of excess supply or demand that results?
  • Use the graph to show you results.
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