Introduction to Economics

GADE, GDADE, GFICO, GDFICO

Course 2014-2015
Exercises No. 1: Topic 1

Exercise 1:
In the region of Huelva a total of 100 hectoliters (hl) of water is available for irrigation
during one season. There are two possibilities to use the water: for irrigation of golf
courses (important to maintain the regional infrastructure for tourism) and the
cultivation of strawberries (a major income source for farmers in the region). The
following table indicates the production of both goods according to the use of the
irrigation water.

Water (hl) Golf holes Water (hl) Strawberries (t)

0 0 100 900
10 10 90 880
20 19 80 850
30 27 70 810
40 34 60 760
50 40 50 700
60 45 40 630
70 49 30 550
80 52 20 450
90 54 10 300
100 55 0 0

a) Define the concepts of the Production Possibility Frontier and opportunity cost.
b) Represent the Production Possibility Frontier graphically, using the data given in
the table above. What are the economic reasons that determine/explain its form?
c) Suppose that at the moment 80 hl water are used to cultivate strawberries. What
would be the opportunity cost to maintain 9 more golf holes? Why?
d) Assume that at the moment 40 hl water are used to irrigate golf courses and the
annual revenue of the region Huelva is 300 per golf hole and 150 per tonne (t)
of strawberries exported. Would you recommend using 10 hl more water to irrigate
golf courses? Why?
e) A brilliant advertising campaign in the Huelva region provokes that golf courses
become a luxury good for which golf players are willing to pay 2000 per golf hole.
Does this change the answer you have given to question d)?

Exercise 2:
Lucas is a student that has a total of 8 days to study for the exams Introduction to
Economics and Introduction to Law. The following table indicates the grade Lucas
will be able to achieve in each of the study subjects according to the possible
combinations to dedicate his time to study for the two exams. (Note: Consider the
grades as being his production and the days available as being the production
resource).

1
 Days Grade
Economics Economics
0 0
1 2
2 4
3 6
4 6.5
5 7
6 7.5
7 9
8 10
Days Grade
Law Law
0 0
1 2.5
2 5.5
3 6.5
4 7.4
5 8.2
6 8.9
7 9.5
8 10

a) Represent graphically the combinations of grades he can achieve.

b) Indicate the (opportunity) cost for improving his grade from 8.2 to a grade of 8.9 in
the Law exam (in terms of his grade in Economics). Define also the concept of
opportunity cost.
c) The parents of Lucas want that their son achieves, at least, a notable in both
exams. Is this possible? Explain.
d) How does Lucas have to distribute his study time in order to get the highest grade
point average between the two study subjects?

Exercise 3:
In a coal mine a total of 100 metric tonnes (MT) of coal is produced. The following table
indicates how the coal produced can be used for heating of family homes and
industrial use in enterprises.

Number of family Number of

Coal (MT) Coal (MT)
homes enterprises
0 0 0 0
10 1500 10 300
20 2450 20 550
30 3200 30 760
40 3900 40 940
50 4500 50 1090
60 5000 60 1210
70 5300 70 1300
80 5500 80 1360
90 5600 90 1400
100 5675 100 1420

a) Represent the Production Possibility Frontier graphically, using the data given in
the table above. What are the economic reasons that determine/explain its form?
b) Suppose that at the moment 70 MT of carbon are used to heat family homes. What
would be the opportunity cost to supply 60 more enterprises with coal? Why?
c) Consider a situation in which each family home pays annually 250 and each
enterprise 1430 per tonne of coal. Calculate the most profitable way for the coal
mine to distribute the coal, considering only the combinations represented in the
table above.
d) Using the results obtained in the previous question c): Would it be reasonable to
recommend another distribution than the one proposed in answer b)? Why?

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Exercise 4:
The following production information for Spain and Italy is available:

Resources necessary to
Spain Italy
produce
One bottle of wine 8 12
One kilogramm of mozarella 32 4

The total resources available to produce the two goods are 200 units.

Are the following statements correct or wrong? Explain.

a) Italy has absolute advantage in the production of both goods.
b) Spain has a comparative advantage in the production of wine.
c) Italy has a comparative advantage in the production of wine.

Note: It might be useful to calculate the opportunity costs.

Exercise 5:
A fictive country dedicates all its resources to the production of two goods: tobacco and
beer. The production possibilities of the country are given in the following table:

Opportunity Opportunity
Tobacco Beer
Option cost cost
(tonnes) (tonnes)
Tobacco Beer
A 32 0
B 28 1
C 24 2
D 17 3
E 9 4
F 0 5

a) Represent the Production Possibility Frontier (PPF) graphically.

b) Complete the columns for the opportunity cost of each good in terms of the other
good. Are the opportunity costs constant? Why?
c) What is the opportunity cost for producing only beer?
d) Can the country produce 18 tonnes of tobacco and 2 tonnes of beer? Explain this
situation.
e) Can the country produce 15 tonnes of tobacco and 4 tonnes of beer? In case it is
possible: Is this combination placed on the PPF? In case it is not possible: How
could it be placed on the PPF?
f) Assume that after a natural disaster the production possibilities for tobacco are
reduced to half of what they have been before. Complete the table with respect to
the new production possibilities and opportunity costs and also represent the new
PPF graphically.

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Exercise 6:
The following production information for China and India is available:

Working hours
Working hours
per meter
per kg rice
fabric (linen)
China 0.75 1
India 0.50 0.50

a) Represent the Production Possibility Frontier for each country if China has a total of
50.000.000 million working hours and India a total of 35.000.000 million working
hours available.
b) Has China an absolute advantage in the production of rice? And in the production
of fabric? In which product does China have a comparative advantage?
c) In the production of which good would each country specialize if the two countries
trade? Why?