ECON 51D – Economic Principles

ECON 202 – Economics II Fall 2005 – Homework Assignment 1

Professor: María Pía Olivero

NAME: ______

MULTIPLE CHOICE SECTION (30 points, 3 points each)

1) When a teacher in a private school points out to her highschool principal that since there are empty seats in all classrooms, the cost of an additional student to the class is really zero, she is using the: a. Law of comparative advantage b. Theory of externalities c. Theory of the cost decrease in the service sector d. Concept of opportunity cost

2) The opportunity cost of choice X can be defined as: a. The cheapest alternative to X b. The most highly valued alternative to X c. The price paid to obtain X d. The most highly priced alternative to X

3) Along the production possibilities frontier trade-offs exist because a. Buyers will want to buy less when prices go up, but producers will want to sell more b. Even on the frontier itself not all production levels are efficient c. At some levels unemployment or inefficiency exists d. The economy has only a limited quantity of resources to allocate between competing uses

4) The Arbezani economy is operating at a point inside its PPF. This may be because: a. The economy has very poor technological know-how b. Arbez is a very small nation and can’t produce much c. Poor management has lead to inefficient use of resources d. Arbez has only a small resource base 5) There are increasing costs in the economy of Arbez. To portray this fact in a ppf we should: a. Move the ppf outward (up and to the right) b. Draw the ppf bulging outwards c. Shift the ppf endpoint on the horizontal axis to the right d. Shift the ppf endpoint on the vertical axis upwards

6) When we draw a PPF we assume that: a. The quantity of capital available increases as we move along the PPF b. The quantity of capital available increases and the quantity of labor as we move along the PPF c. The quantity of labor available increases as we move along the PPF d. The quantity of capital and labor is fixed

7) A productivity decrease would be illustrated by: a. a shift in the production function downward. b. a shift in the production function leftward. c. a shift in the production function upward.

8) Higher rates of productivity growth are most closely associated with higher rates of a. consumer spending b. investment spending c. government spending d. import spending of consumption goods

9) An increase in the rate of inflation: a. Shifts the PPF up in a parallel fashion. b. Shifts the PPF down in a parallel fashion. c. Tilts production towards consumption relative to investment goods. d. Hampers future economic growth. e. Both c and d

10) Engaging in international trade allows an economy to: a. Produce and consume at a point above the PPF b. Produce at a point on the PPF for sure c. Consume at a point above the PPF d. Get opportunity costs to be constant and therefore, operate on a straight PPF SHORT ANSWER SECTION

Question 1 (20 points) January 25, 2002. A headline in the New York Times read: “Many ride out the recession in a graduate school harbor”. The article goes on to talk about a sharp rise in enrollment in schools of business, law, etc. as laid off workers and college seniors are waiting out the recession. Think of people behaving rationally (relate your discussion to one or more of the concepts learned in Section I) and say why the bigger the recession, the more people enter grad school.

Question 2 (50 points) Draw and explain a production possibilities frontier for an economy that produces both milk and cookies. What happens to the frontier if a disease kills half of the economy’s cow population? Reading 1 (for section II): “Gains in US Productivity: Stopgap Measures or Lasting Change?”, FRBSF Economic Letter, Number 2005-05, March 11, 2005.

1) According to the article, what are (most likely) the determinants of productivity growth for the period 2001-2004? (20%)

2) What explains the differences in productivity growth across US states? How do you know that? (20%)

3) How is labor productivity defined when using state data? (20%)

4) Describe the “geographical pattern” followed by the increase in average US productivity growth after 2000. (20%)

5) Were productivity increases real or just the effect of higher businesses caution? (20%)