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4 essay type questionsQUESTION 1Suppose the hypothetical country Cascadia can only produce two goods: furniture and paper. Further suppose there is only one factor of production, timber, which can be used to produce either furniture or paper in Cascadia. For the purpose of this question, you can assume there is only one kind of timber and it is equally good when producing furniture or paper. (ie: Cascadia doesn’t have any specialized factors of production.) If Cascadia allocates all of their timber supply to furniture production, they can produce 200,000 pieces of furniture. Alternatively, if they allocate all of their timber supply to paper production, they can produce 400,000 tons of paper. a.Draw the PPF (production possibilities frontier) for Cascadia. Make sure to label both axes. Also don’t forget to show the greatest amount of paper and furniture they can produce. (4 pts) b.What is the opportunity cost of producing one piece of furniture for Cascadia? (4 pts)

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QUESTION 1> Suppose the hypothetical country Cascadia can only produce two goods:
furniture and paper. Further suppose there is only one factor of production, timber, which
can be used to produce either furniture or paper in Cascadia. For the purpose of this
question, you can assume there is only one kind of timber and it is equally good when
producing furniture or paper. (ie: Cascadia doesn’t have any specialized factors of
production.) If Cascadia allocates all of their timber supply to furniture production, they
can produce 200,000 pieces of furniture. Alternatively, if they allocate all of their timber
supply to paper production, they can produce 400,000 tons of paper. a.Draw the PPF
(production possibilities frontier) for Cascadia. Make sure to label both axes. Also don’t
forget to show the greatest amount of paper and furniture they can produce. (4 pts) b.What
is the opportunity cost of producing one piece of furniture for Cascadia? (4 pts)
c.What is the opportunity cost of producing one ton of paper for Cascadia? (4 pts)
d.Consider the production point 100,000 pieces of furniture and 200,000 tons of paper.
Show this production point on your plot from part a. Is this production point feasible? Is it
efficient? (4 pts) e.Now consider the production point 150,000 pieces of furniture and
200,000 tons of paper. Show this production point on your plot from part a. Is this
production point feasible? (4 pts) f.If the production point in part e is not feasible, how can
Cascadia make it feasible? (5 pts)
QUESTION 2 (25 pts) Concession prices at movie theaters is a frequent topic of discussion
between moviegoers. One typical example is the price of popcorn at movie theaters. To
make this question more concrete, consider the price of a large bucket of popcorn at AMC
theaters: $9.00. It is possible to purchase the same amount of popcorn at a super market
chain for half the price: $4.50. a. Movie theaters typically don’t let moviegoers bring food
into theaters. But many moviegoers enjoy eating popcorn and sipping soda when watching
their favorite movie. Considering these two facts, is the demand for popcorn at movie
theaters price elastic or inelastic? (In terms of economics, does the quantity demanded for
popcorn decrease more than 1% when the movie theater increases the price of popcorn by
1 %?) (5 pts)
b. Outside the movie theater there are many alternative places where popcorn can be
purchased. Consider the price of popcorn at the super market chain, QFC. Suppose QFC
would like to do the same thing as AMC theaters and charge $9.00 for popcorn. What would
happen to quantity demanded for popcorn at QFC? Is the demand for popcorn at a super
market price elastic or inelastic? (5 pts) c. What happens to AMC theaters’ revenue from
selling popcorn if they increase the price of popcorn by 1 %? Does their revenue increase
or decrease? (Recall revenue is equal to price times quantity sold.) If their revenue
increases in this case, can AMC keep on increasing the price of popcorn forever to increase
their revenue? (Hint: The price elasticity of demand is not the same at all points along the
demand curve.) (10 pts)
d. What happens to QFC’s revenue from selling popcorn if they increase the price of
popcorn by 1 %? Does their revenue increase or decrease? (5 pts)
QUESTION 3 (25 pts) Consider the market for oranges in the US. Suppose we begin with an
equilibrium in this market, where quantity produced is equal to quantity demanded, which
is equal to 5 million tons of oranges. Further suppose the price of a pound of oranges is
$2.50. a. Illustrate this equilibrium by using supply and demand curves. Don’t forget to
label the axes, show the equilibrium quantity and the equilibrium price. (5 pts) b. Now
suppose a tropical storm hits Florida destroying 1 million tons of oranges in citrus farms.
What happens to the supply curve? What happens to the equilibrium price? Do we have a
shortage or a surplus of oranges in the wake of the tropical storm? Show by using your plot
from part a. (5 pts)
c. How does the market for oranges transition to its new equilibrium? In the new
equilibrium, is the price of oranges higher or lower than the initial equilibrium price,
$2.50? Is the new quantity demanded higher or lower than 5 million tons? (5 pts) d. Now
suppose the same thing happens in Venezuela, where there is central planning. A tropical
storm hits the citrus farms in Venezuela. Citrus farmers would like to adjust their prices
following the storm but they have to wait until the next meeting of the Central Planning
Committee, since the Central Planning Committee is the only one who can change the
prices of oranges. Can the Venezuelan people enjoy as many oranges as they would like?
Can the market for oranges in Venezuela transition to a new equilibrium on its own? (10
pts)
QUESTION 4 (25 pts) Price of oil increased significantly during 1970s due to two major
events. First the oil embargo from Arab countries in the Middle East to Western countries
following their support for Israel during the Yom Kippur War (1973) and second the
Iranian Revolution in 1979. Oil is refined to produce gasoline for cars and as the price of oil
increased during 70s, the cost of producing gasoline went up as well. These two events
during 70s are commonly known as “Oil Shocks”. More generally, the “Oil Shocks” are
examples of what are termed negative supply shocks that you will learn in your
macroeconomics courses. a. Illustrate the effect of the “Oil Shocks” on the market for gas by
using supply and demand curves. (Recall oil is an input used to produce gas.) Do the oil
shocks produce a surplus or shortage for gas? (10 pts)
b. In the face of sky-rocketing gas prices, Nixon administration in 1973 imposed a
maximum price on gas. (The depressed pump prices imposed during 1973 went through
several iterations during 80s.) The price ceiling on gas brought about long lines at gas
stations and a shortage of gas during 70s. Now illustrate this binding price ceiling on gas in
your plot from part a. (10 pts)
c. Oil is a curious commodity in that its price affects the cost of transportation of people and
other commodities. Hence when there is an “Oil Shock”, it doesn’t only increase the price of
gas, but through the price of gas it also increases the price of transporting everything. Since
the great majority of goods in a modern economy are not consumed at the location they are
produced and have to transported, “Oil Shocks” increased the cost of transporting
everything in 70s, creating higher costs for producers. Now again consider the market for
oranges. Illustrate what happened to the market for oranges in the US during 70s following
the “Oil Shocks”. What happened to the price of oranges? (5 pts)
BONUS TRIVIA: US doesn’t only consume oil but also produces and exports it (ie: sells its
oil to foreign countries). In 1977, the Carter administration imposed a ban on oil exports
from the US to foreign countries, because they were concerned with the increasing price of
oil. This ban was only recently lifted in 2015 after almost 40 years thanks to the shale oil
revolution here in the United States.

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Tags:
managerial economics

opportunity cost

Academy of Chinese Culture and Health Sciences

greatest amount of paper

pieces of furniture

demand for Popcorns

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