Problem 1

Bill can produce either tables or chairs. Bill can work up to 10 hours a day. His production possibilities are given in the table below:

• Construct the production possibilities frontier (PPF) for Bill. Put tables on the Horizontal axis and chairs on the vertical axis.
• What is Bill’s opportunity cost of producing one additional table?
• What is Bill’s opportunity cost of producing one additional chair?
• Currently Bill is producing 20 tables and 40 chairs.

• Is this allocation of resources efficient? Why?
• Show this allocation on the graph and advise Bill how he can be more efficient.

Problem 2

Suppose the market for corn is given by the following equations for supply and demand:

QS = 2p ? 2

QD = 13 ? p

where Q is the quantity in millions of bushels per year and p is the price.

1)Calculate the equilibrium price and quantity.

2)Sketch the supply and demand curves on a graph indicating the equilibrium quantity and price.

3)Calculate the price-elasticity of demand and supply at the equilibrium price/quantity.

4)The government judges the market price is under expectations and announces a price floor equal to $7 per bushel.

a)Would there be a surplus or a shortage?

b)What would be the quantity of excess supply or demand that results?

c)Use the graph to show you results.