1. The economy of the university town of Avicenna produces two and only two commodities: yoga lessons, and triple lattes. The economy is able to produce any of the following combinations of yoga and lattes per day: CLO 1 [4 MARKS]

Daily Production in Avicenna

Combination Yoga Lessons Triple Lattes

A 5000 0

B 4000 9000

C 3000 16000

D 2000 21000

E 1000 24000

F 0 25000

a) Using the data in the table, graph the daily production possibilities frontier (ppf) of the Avicenna economy. Put triple lattes (“TL”) on the vertical axis.

b) Does the principle of “increasing opportunity cost” hold in this town’s economy? Think about what happens to the opportunity cost of TLs—measured in units of yoga lessons (“YL”)—as the amount of resources devoted to producing TLs increases. Explain briefly.

c) On your graph, pick and label one point that is: (i) an impossible and unattainable level of YL and TL production, (ii) an attainable but inefficient level of YL and TL production, (iii) an efficient level of production of YL and TL.

2. Show, by means of a labeled diagram, the market demand and supply for a product. Indicate the equilibrium price and quantity in this market. CLO 2 [4 MARKS]

Explain, with the aid of a separate diagram in each case, the effects which each of the following may have on the above equilibrium position:

a) A successful advertising campaign in favour of the product is introduced;

b) A tariff on imports of the product is removed.

3. Many policy analysts believe that government should only intervene when market failures exist. The readings and class discussion discuss several different types of market failures that provide rationales for why government provides a wide range of goods and services. For each of the following, describe the rationale(s) that support government intervention Be as specific as possible and use the terms and concepts to identify one or more rationales for each government action: CLO 5 [4 MARKS]

a. Federal government requiring nutrition labels on foods

b. State governments banning smoking in all public places

c. Local governments zoning land use

d. Local governments providing trash collection services to residents

4. Derek is the owner of the only movie theater in town. By hiring several well-trained economists, Derek learns that the people watching movies after 8 P.M. have a much higher average willingness to pay than people watching at 5 P.M. The costs of showing a movie are identical at 5 P.M. and 8 P.M. To maximize his profit, what should Derek do? Give him some specific advice, including drawing him a diagram or two. (Derek can get his economists to interpret your diagrams as long as you label all the axes and all the curves.)

CLO 3[4 Marks]

5. Suppose that your city grants one pizza delivery service a legal monopoly on delivering pizzas; all other pizza delivery services must close. CLO 4[4 Marks]

a. What will happen to the price and quantity of delivered pizzas?

b. What will happen to the profit of the owner who has been granted the monopoly? c. Suppose that the owner offers to sell the pizza delivery company to you. Would you be able to earn an economic profit? Be careful when you answer this question; think about the price the previous owner will charge you for the business.

Answer rating: 100% (QA)

1 Daily Production in Avicenna a Graph the daily production possibilities frontier PPF The PPF graph represents the tradeoff between yoga lessons YL a... View the full answer