Economics

SIM Assignment 1, 2013

Due date : Oct 7 for Monday class.
: Oct 9 for Wednesday class.
1.
An economy produces two goods, X and Y. A unit of capital can produce either
1 unit of X or 1 unit of Y (or any linear combination of the two). A unit of labour can
produce either unit of X or 1 unit of Y (or any linear combination of the two). There are
80 units of capital and 100 units of labour. Both capital and labour must be used to
produce X and Y. In addition, good X requires storage space which has a capacity to
store up to 40 units of X.
(a) Draw the production possibility frontier.
(b) What would be the opportunity cost of X had the economy efficiently produced 19
units of it?
(c) If the economy initially produced 30 units of X efficiently, how many units of X and Y
will the economy produce if the international price of X is 1.5 units of Y per X?
(d) Will trade take place?
2.
Botak Corporation is a producer of good X, which is a medicinal hair tonic that claims to
restore the crowning glory in man experiencing hair loss. The company is aware that
usage of the tonic up to quantity XH per month is effective, but usage beyond that is
considered excessive and may cause unwanted hair growth in other parts of the body.
It therefore provides an option for its users by reducing the price of X to promote its
usage up to XH per month and increasing its price sharply thereafter to discourage its
usage.
a) In a world of two goods (X and Y), draw the budget lines confronting Botak
Corporations clients before the option.
b) Draw the budget lines confronting Botak Corporations clients after the option.
c) For individuals who initially consume less than XH and who treat X as a Normal good,
will their consumption of X increase?

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