Econ 200, Spring 2009

Stiglitz and Walsh, Chapter 2.

1. You plan to go to university summer school. If you do, you will not be able to take a contract job that
pays $6000 for the summer and you will not be able to live at home for free. The cost of you tuition will be
$2000 textbooks $200 and living expenses $1400. What is the cost of going to the university summer
school?

2. To earn extra money in the summer you grow tomatoes and sell them at the farmers’ market for 30 cents
per pound. By adding compost to your garden you can increase your production as shown in the following
table. Compost costs 50 cents per pound.
a. Draw a graph that shows the production of tomatoes in pounds as function of the amount of compost used.
Describe the shape of the graph. (increasing/decreasing. Rate of increase?)
b. Draw a graph that shows the marginal benefit of compost measured in pounds of tomatoes as a function
of the amount of compost used. Describe the shape of the graph.
c. If your goal is to make as much money as possible, how many pounds of compost will you use?

Pounds of compost 0 1 2 3 4 5 6
Pounds of tomatoes 100 120 125 128 130 131 131.5

3. Suppose there are 10 million workers in Canada, and that each of these workers can produce either 2
cars or 30 tons of wheat in a year.
a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a
ton of wheat in Canada?
b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how
much wheat can it consume without trade? Label this point on the production possibilities frontier
diagram.
c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 tons
of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow
Canada to consume? Label this point on the diagram.
d. Should Canada accept this deal? Explain.

4. The production function shows the maximum amount of output which can be produced with a
given amount of input(s). We get a production chart by evaluating the production function at
certain values of the input(s).
EXAMPLE: Workers cooperative
Assumptions:
(i) The only scarce resource in our workers cooperative is labor.
(ii) Workers can produce only two commodities, tables, or chairs, as shown in the production
charts:

Input: Output: Input: Output:

Workers building tables Number of
tables
0 0
1 1
2 2
3 3
4 4
5 5
Workers building chairs Number of
chairs
0 0
1 5
2 9
3 12
4 14
5 15

(iii) All workers are employed.

INPUT: no. of workers in OUTPUT combinations

Combination Tables Chairs The economy no. of Tables no. of Chairs

A 0
B 1
C 2
D 3
E 4
F 5

The production possibilities frontier or PPF for an economy (in our case, the workers’ cooperative)
shows the output combinations (in our case number of tables and number of chairs) which can be
built when its scarce resources (in this case labor) are fully employed.

a. Plot these combinations on a graph (measure no. of tables on the vertical axis). Combine these
points with straight lines to draw in the Production Possibilities Frontier (PPF).
b. Assuming that resources are fully employed, calculate the opportunity cost for the first table,
then for the second table. Do this for each additional table. Do the opportunity costs increase, or
decrease? Why?
c. Consider the combination G = {2 tables, 5 chairs}. What is the opportunity cost of an additional
table at this point?

5. Stiglitz and Walsh, Chapter 2, Problem 5.