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					                                                                       Dr. Amanda S. King
                                                                              ECON 2105

Answer Key for Practice Problems for Circular Flow Diagram and PPF

     1. revenue ($2000)                                     spending ($2000)
                                              Market for
     a)
                                              Goods &
                            catering services                 catering services
                                              Services




This process starts at spending and goods & services


     b)                  revenues ($30,000)                     spending ($30,000)
                                              Market for
                            200 jackets       Goods &         200 jackets
                                              Services




            I would start this process at revenues and the product side, although it would
be ok to start with spending and goods & services. Since the scenario states that
NorthFace sells the jackets to the US Olympic team it seems more reasonable to start on
the left side of the top section of the circular flow diagram.


c)


                                (Jenny)                          (Jenny as worker)
                            Inputs in prodn Market for        land, labor,K
                                            factors of
            Wages, rent, profits ($30,000) production         income ($30,000)


          You could start this process either at Jenny supplying labor and receiving income
          or at GSU getting an input into production and paying wages in return.
                       revenues ($700,000)                    spending ($700,000)
     d)                                  Market for
                         100 computers Goods &             100 computers
                                         Services




            I would start this process at revenues and the product side, although it would
be ok to start with spending and goods & services. Since the scenario states that Gateway
sells the computers to GSU it seems more reasonable to start on the left side of the top
section of the circular flow diagram.

                       revenues                               spending ($10)
     e)                                   Market for
                         product          Goods &          track spikes
                                          Services




This process starts at spending and goods & services

f)



                              (James)                          (James as worker)
                          Inputs in prodn Market for        land, labor,K
                                          factors of
          Wages, rent, profits ($1000)    production      income ($1000)


        You could start this process either at James supplying labor and receiving income
or at Dell getting an input into production and paying wages in return.
2. a)
                        geraniums




                                                                 sprinklers

   b) The PPF is curved due to specialization of resources. Some resources in the
      economy are better suited to geranium production and others are better for
      sprinkler production, but all resources could be used to produce either good.

   c) When starting from point B, the opportunity cost of gaining 100 geraniums is
      losing 15 sprinklers.

   d) When starting from point A, the opportunity cost of gaining 200 geraniums is
      losing 23 sprinklers.

   e) The PPF will rotate out from the original end point on the sprinklers axis (see red
      curve above).

3. A is not efficient because it is possible to move out to a point ON the PPF (such as C)
without opportunity cost. This is because resources are being wasted at point A. Point B
is an efficient point because the resources are being used in a way to produce the
maximum amount of goods possible (there is no waste).


                      M



                                       A                 C



                                                             B

                                                                     F

   4. a) D—resources are being wasted.
                    b) A, B, C
                    c) All of the feasible combinations of production given a set
                       amount of resources.
                    d) Resources are specialized.

   5. a) 0 (there is no opportunity cost)
      b) point D is inefficient.

   6. Problems from text:
1. a) losing 5 percent on his economics course grade
    b) losing 10 percent on his economics course grade

2. a) losing 3% on her math grade
   b) losing 5% on her math grade

3. The opportunity cost of an hour playing increases as he spends more time playing
tennis.

4. The opportunity cost of an hour skiing increases as she spends more time skiing.

				
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