Reference no: EM132154813
1. What are the key elements of the scientific method and how does this method relate to economic principles and laws?
2. Suppose you won $15 on a Lotto Canada ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. The price of candy bars is $.75 and the price of peanuts is $1.50.
a.Construct a table showing the alternative combinations of the two products that are available.
b.Plot the data in your table as a budget line in a graph. What is the slope of the budget line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do these opportunity costs rise, fall, or remain constant as each additional unit of the product is purchased.
c.How, in general, would you decide which of the available combinations of candy bars and bags of peanuts to buy?
d.Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line in your diagram. Why would this budget line be preferable to the old one?
3. Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts):
Type of Production Production Alternatives
A B C D E
Automobiles
Forklifts 0
30 2
27 4
21 6
12 8
0
a.Show these data graphically. Upon what specific assumptions is this production possibilities curve based?
b.If the economy is at point 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 fork lifts, what could you conclude about its use of 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?
4. The production possibilities curve below shows the hypothetical relationship between the production of guns (national defense) and butter (social goods) in an economy.
Combination
Guns Butter
A 0 4
B 14 3
C 26 2
D 36 1
E 44 0
(a) What is the marginal opportunity cost of producing the second unit of butter?
(b) What is the total opportunity cost of producing the second unit of butter?
(c) What is the marginal opportunity cost of producing the third unit of butter?
(d) What is the total opportunity cost of producing the third unit of butter?
5. A production possibilities table for two products, grain and airplanes, is found below. Usual assumptions regarding production possibilities are implied. Grain is measured in metric tons and airplanes are measured in units of 1,000.
(a) Using the graph construct a production possibilities curve from this information placing grain on the vertical axis and airplanes on the horizontal axis.
(b) What is the opportunity cost of producing the first unit of airplanes? The marginal opportunity cost of producing the fourth unit of airplanes?
Grain Airplanes
Combination (metric tons) (l,000s)
A 0 7
B 14 6
C 26 5
D 36 4
E 44 3
F 50 2
G 54 1
H 56 0
6. What is the economic rationale for the law of increasing costs?
7. In the following graph, explain the relationship between marginal cost and marginal benefit at 1 million units of output, 2 million units of output, and 3 million units of output for the production of computers. In your explanation discuss the overallocation of resources, underallocation of resources, and optimal allocation of resources for the production of computers.