02 Jun Question Question 1 The following is a set of hypothetical produc
Question
Question 1
The following is a set of hypothetical production possibilities for a nation:
Combination Turkeys (thousands) Chickens (thousands)
A 0 20
B 4 18
C 8 14
D 12 8
E 16 0
(a) What is the opportunity cost of the first 8,000 chickens produced? Explain in words.
(b) Between which points is the opportunity cost per thousand turkeys the highest? Explain in words.
(c) Does this production possibilities frontier reflect the law of increasing opportunity costs? Explain.
(d) Suppose a new strand of bird flu emerges but only affects turkeys. What effect could this have on
the production possibilities frontier? Use a diagram (you can ignore the numbers in the table when
drawing it) and explain in words.
Question 2
Why is it a better idea to tax cigarettes than fruit juice? Explain using words and diagrams.
Hint: Consider the effect the tax will have on the producer, consumer and the government.
Question 3
(a) Why might a firm continue to operate in the short-run if it is making a loss? Use a diagram and explain in words.
(b) Suppose that this firm remains in the industry and all other firms are also making losses. What
will happen to its profits and quantity produced in the long-run? What will happen to the market price and quantity? Use diagrams and explain in words. For simplicity, assume the firm’s costs remain the same (i.e. there is no change to its marginal cost and average cost schedules).
Question 4
Suppose real GDP fell by 5% from 2007 and 2008.
(a) Complete the following table. Show your working and reasoning. Year Nominal GDP ($ million) GDP deflator (Base Year 2007) Real GDP ($ million) 2007 1000
2008 120
(b) What is the growth rate of nominal GDP from 2007 to 2008?
(c) Why is there a difference in the growth rates of real and nominal GDP? Would we use nominal or real GDP to measure economic growth? Why?
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