Name: __________________________ PROBLEM SET #1 MACROECONOMICS Hand in this problem set on December 11, 2012 at 7:00 a.m.

Score/Rating: _________________

1. The table below represents the production possibilities for the island nation of Masagana. Coconuts 100 90 75 55 30 0 Pineapples 0 20 40 60 80 100

a. Draw the production possibilities frontier (PPF) for Masagana. On your graph, place Coconuts on the vertical axis and Pineapples on the horizontal axis. 2. The Philippines produces two goods food and durable goods using capital and labor. In this problem, you need to analyze how a series of events would affect the countrys PPF in 2026. For each event, draw a graph that indicates the initial PPF in 2025 and the PPF in 2026, after the event has occurred. Place food on the vertical axis and durable goods on the horizontal axis. a. There is an increase in the labor force for the Philippines. b. A natural disaster leads to a decrease in the nations stock of capital. 3. Encircle the letter of your choice. y

.H
PPF x

In the figure on the first page, which of the following is not true regarding point H? Point H: (A) (B) (C) (D) (E) Cannot be achieved by this economy today. Could be achieved today if the economy only achieved full employment. Could be achieved in the future by an enlargement of the economys resources base Could be achieved in the future by advancement in technology. Could be achieved in the future by growth in the economy.

4. Encircle your answer. Economic growth may be represented by a (an) (A) Leftward shift of a production possibilities curve. (B) Outward shift of a production possibilities curve. (C) Movement along a production possibilities curve. (D) Production possibilities curve that remains fixed. 5. The population of an isolated island consists of 10 people. In one year, each person can either pick 100 bunches of bananas, or, alternatively, tend an oven that bakes bananas into banana bread. There is only one oven in the island and that has a capacity of producing 100 loaves of banana bread per year. This one oven on the island can be either fully utilized (producing 100 loaves of banana bread per year) or not used at all. One person is needed to tend the oven. To produce 100 loaves of banana bread the oven requires 100 bunches of bananas. a. What does the production possibilities frontier (bananas versus banana bread) for the island look like? (Put banana bread on the horizontal axis.) b. What is the opportunity cost of producing 100 loaves of banana bread? c. Depict the possible consequence of each of the following on the islands PPF curve. Draw the graphs of each item. (i) A new technology is discovered that allows 100 loaves of banana bread to be baked with only 50 bunches of bananas in each of the two ovens. (ii) A severe hurricane strikes the island, destroying all the banana trees. (iii) A magician migrates to the island with the capacity to convert every bunch of bananas into a loaf of banana bread.

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