EXERCISES FOR CHAPTER 1

Exercise 1.1 An economy has 100 identical workers. Each one can produce four cakes or
three shirts, regardless of the number of other individuals producing each good.

(a) How many cakes can be produced in this economy when all the workers are cooking?

(b) How many shirts can be produced in this economy when all the workers are sewing?

(c) On a diagram with cakes on the vertical axis, and shirts on the horizontal axis, join these
points with a straight line to form the PPF.

(d) Label the inefficient and unattainable regions on the diagram

Exercise 1.2 In the table below are listed a series of points that define an economy’s
production possibility frontier for goods Y and X.

(a) Plot these pairs of points to scale, on graph paper, or with the help of a spreadsheet.

(b) Given the shape of this PPF is the economy made up of individuals who are similar or
different in their production capabilities?

(c) What is the opportunity cost of producing 100 more Y at the combination (X = 5500,Y =
300).

(d) Suppose next there is technological change so that at every output level of good Y the
economy can produce 20 percent more X. Enter a new row in the table containing the new
values, and plot the new PPF.

Exercise 1.3 Using the PPF that you have graphed using the data in Exercise 1.2, determine
if the following combinations are attainable or not: (X = 3000,Y = 720), (X = 4800,Y = 480).

Exercise 1.4 You and your partner are highly efficient people. You can earn $20 per hour in
the workplace; your partner can earn $30 per hour.

(a) What is the opportunity cost of one hour of leisure for you?

(b) What is the opportunity cost of one hour of leisure for your partner?

(c) Now consider what a PPF would look like: You can produce/consume two things, leisure
and income. Since income buys things you can think of the PPF as having these two
’products’ – leisure and consumption goods/services. So, with leisure on the horizontal axis
and income in dollars is on the vertical axis, plot your PPF. You can assume that you have 12
26 Exercises for Chapter 1 hours per day to allocate to either leisure or income. [Hint: the
leisure axis will have an intercept of 12 hours. The income intercept will have a dollar value
corresponding to where all hours are devoted to work.]
(d) Draw the PPF for your partner.

Exercise 1.5 Louis and Carrie Anne are students who have set up a summer business in their
neighborhood. They cut lawns and clean cars. Louis is particularly efficient at cutting the
grass – he requires one hour to cut a typical lawn, while Carrie Anne needs one and one half
hours. In contrast, Carrie Anne can wash a car in a half hour, while Louis requires three
quarters of an hour.

(a) If they decide to specialize in the tasks, who should cut the grass and who should wash
cars?

(b) If they each work a twelve hour day, how many lawns can they cut and how many cars
can they wash if they each specialize in performing the task where they are most efficient?

(c) Illustrate the PPF for each individual where lawns are on the horizontal axis and car
washes on the vertical axis, if each individual has twelve hours in a day.

Exercise 1.6 Continuing with the same data set, suppose Carrie Anne’s productivity
improves so that she can now cut grass as efficiently as Louis; that is, she can cut grass in one
hour, and can still wash a car in one half of an hour.

(a) In a new diagram draw the PPF for each individual.

(b) In this case does specialization matter if they are to be as productive as possible as a
team?

(c) Draw the PPF for the whole economy, labelling the intercepts and the ‘kink’ point
coordinates.

Exercise 1.7 Going back to the simple PPF plotted for Exercise 1.1 where each of 100
workers can produce either four cakes or three shirts, suppose a recession reduces demand for
the outputs to 220 cakes and 129 shirts.

(a) Plot this combination of outputs in the diagram that also shows the PPF.

(b) How many workers are needed to produce this output of cakes and shirts?

(c) What percentage of the 100 worker labor force is unemployed?

EXERCISES FOR CHAPTER 2

Exercise 2.1 An examination of a country’s recent international trade flows yields the data in
the table below.
(a) Based on an examination of these data do you think the national income and imports are
not related, positively related, or negatively related?

(b) Plot each pair of observations in a two-dimensional line diagram to illustrate your view of
the import/income relationship. Measure income on the horizontal axis and imports on the
vertical axis. This can be done using graph paper or a spreadsheet-cum-graphics software.

Exercise 2.2 The average price of a medium coffee at Wakeup Coffee Shop in each of the
past ten years is given in the table below.

(a) Construct an annual ‘coffee price index’ for this time period using 2005 as the base year.
[Hint: follow the procedure detailed in the chapter – divide each yearly price by the base year
price.]

(b) Based on your price index, what was the percentage change in the price of a medium
coffee from 2005 to 2012?

(c) Based on your index, what was the average annual percentage change in the price of
coffee from 2005 to 2010?

(d) Assuming the inflation rate in this economy was 2% every year, what was the real change
in the price of coffee between 2007 and 2008; and between 2009 and 2010?

Exercise 2.3 The following table shows hypothetical consumption spending by households
and income of households in billions of dollars.
(a) Plot the scatter diagram with consumption on the vertical axis and income on the
horizontal axis.

(b) Fit a line through these points.

(c) Does the line indicate that these two variables are related to each other?

(d) How would you describe the causal relationship between income and consumption?

Exercise 2.4 Using the data from Exercise 2.3, compute the percentage change in
consumption and the percentage change in income for each pair of adjoining years between
2006 and 2013.

Exercise 2.5 You are told that the relationship between two variables, X and Y, has the form
Y = 10 + 2X. By trying different values for X you can obtain the corresponding predicted
value for Y (e.g., if X = 3, then Y = 10+2×3 = 16). For values of X between 0 and 12,
compute the matching value of Y and plot the scatter diagram.

Exercise 2.6 For the data below, plot a scatter diagram with variable Y on the vertical axis
and variable X on the horizontal axis.

(a) Is the relationship between the variables positive or negative? (b) Do you think that a
linear or non-linear line better describes the relationship?
(b) Do you think that a linear or non-linear line better describes the relationship?