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AASTU Assignment 3

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13 views1 page

AASTU Assignment 3

Uploaded by

kamebmt555
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Addis Ababa Science and Technology University

College of Natural and Social Sciences


Assignment I
1. Consider a hypothetical small economy which produces only two goods:
industrial good (e.g. cars) and consumer good (milk). The following table
gives several points on this economy's production possibility frontier. Cars are
measured in numbers and production of milk is measured in gallons.
Possibilities Cars (thousands/year) Milk (thousands of
gallons/year)
A 0 90
B 1 80
C 2 65
D 3 45
E 4 20
F 5 0
Based on the above information, respond to the following questions:

A. Draw the Production Possibility Frontier (PPF) for this economy. Just for
convenience put milk on the y- axis and cars on the x-axis.
B. Explain the economic intuition why the PPF has a negative slop.
C. Explain the economic intuition why the PPF is concave from the origin or bowed
outwards.
D. Suppose the economy is currently producing 3000 cars and 45,000 gallons of
milk. What is the opportunity cost of producing additional 20,000 gallons of milk?
E. Suppose the economy experiences an advance in production technology only
for the production of cars. What is the effect of this on the PPF
F. Suppose the economy decides to adopt automation technology to boost milk
production. What will be the effects on the PPF? Use graph to illustrate your
answer.
G. Suppose the economy experiences a severe cattle disease which kills large
number of cows. How the PPF is affected by this shock? Support your answers
with graph.
2. Consider a market for maize. For each of the events/factors listed below,
identify which of the determinants of supply or demand are affected and
indicate whether demand or supply is increased or decreased. Use the
appropriate graph to show the effects of these changes on the price and
quantity of maize.
A. People decide to have more cornflakes during the breakfast.
B. A drought during maize production season raises maize seed price.
C. Scientists develop new high yield seeds for maize production.
D. Expansion of cash crops (e.g. coffee) raises land rents/prices.
E. The use of biofuel reduces maize availability for consumption purpose.
F. Financial crisis lowers people’s wealth.

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