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					Econ 101                                                              Sekhposyan, Summer I, 2007

                                              Problem Set 1
Due Date: May 18, 2007




For questions 1 – 6 refer to Figure 3-2.

1. For Ben, the opportunity cost of 1 pound of ice cream is

    a.   1/14 pound of cones.
    b.   1/2 pound of cones
    c.   2 pounds of cones.
    d.   4 pound of cones.

2. For Ben, the opportunity cost of 1 pound of cones is

    a.   1/4 pound of ice cream.
    b.   1/2 pound of ice cream.
    c.   2 pounds of ice cream.
    d.   4 pounds of ice cream.

3. Ben has a comparative advantage in

    a.   cones and Jerry has a comparative advantage in ice cream.
    b.   ice cream and Jerry has a comparative advantage in cones.
    c.   neither good and Jerry has a comparative advantage in both goods.
    d.   both goods and Jerry has a comparative advantage in neither good.

4. Ben has an absolute advantage in

    a.   ice cream and Jerry has an absolute advantage in cones.
    b.   cones and Jerry has an absolute advantage in ice cream.
    c.   neither good and Jerry has an absolute advantage in both goods.
    d.   both goods and Jerry has an absolute advantage in neither good.



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5. Originally, Ben was producing at his point A and Jerry was producing at his point A. Then,
   each person decided to specialize in the product in which he has a comparative advantage.
   Furthermore, they agreed to trade 4 pounds of cones for 2 pounds of ice cream. As a result of these
   new arrangements, the gains from trade relative to the original situation are as follows:

    a.        1 additional pound of cones for Ben and 1 additional pound of ice cream for Jerry.
    b.        1 additional pound of ice cream for Ben and 1 additional pound of cones for Jerry.
    c.        2 additional pounds of ice cream for Ben and 2 additional pounds of cones for Jerry.
    d.        2 additional pounds of ice cream for Ben and 1 additional pound of cones for Jerry.

6. Suppose Ben’s production possibilities frontier is based on 4 hours of work. How much time
   does Ben require to produce 1 pound of ice cream?

    a.        1/2 hour
    b.        1 hour
    c.        2 hours
    d.        The answer cannot be determined from the given information.

(Questions 7-8) Use the production possibilities frontier in Figure 1 to answer questions 1-2.

                                   Biscuits
                                              A

                                                  B       C
                                                                    D



                                                                        E



                                                                            F


                                                                                Rolls
                                                         Figure 1

7. What point represents the maximum number of biscuits that can be produced?

         a.     D
         b.     B
         c.     C
         d.     A
         e.     F

8. The shape of the production possibilities frontier in Figure 1 implies that

         a.     some resources are better suited for producing biscuits than for producing rolls
         b.     the opportunity cost of producing more rolls falls as roll production rises
         c.     the opportunity cost of producing more biscuits rises as biscuit production rises
         d.     the financial cost of producing biscuits is higher than the financial cost of producing rolls
         e.     both (a) and (c) are correct




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9. Suppose we are analyzing the market for burritos in Chapel Hill. Graphically illustrate the impact
   each of the following would have on the market for burritos.

                Draw and label the supply and demand curves
                Label both axes
                Shift the appropriate curve
                Label the initial equilibrium price (P0) and quantity (Q0)
                Label the final equilibrium price (P1) and quantity (Q1)


    a. Price of pizza, a substitute for burritos, falls.




    b. The price of tortilla shells falls.




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c. Average income increase in Chapel Hill and burritos are inferior good.




d. The price of beer, a compliment, falls.




e. True of False: In a perfectly competitive market, buyers and sellers are price takers.




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