PROF. MOHAMMAD ELSAKKA MICROECONOMICS

HOMEWORK # 1

Problem #1:

Suppose that Shahad has budgeted KWD 20 a month to buy candy bars, music downloads, or some combination of each. If Shahad buys only candy bars She can obtain 40 bars a month; if he buys only downloads, he can buy 20 a month.

  1. What is the price of a candy bar?
  2. What is the price of a music download?
  3. What is the opportunity cost of a music download?
  4. What is the opportunity cost of a candy bar?
  5. Would the opportunity cost of each good change if Shahad decided to increase her monthly budget to KWD30 for the two items?

Problem #2:

Suppose that a nation's production possibilities can be represented by the table below:

Production Alternatives
Products / A / B / C / D / E
Food / 0 / 4 / 8 / 12 / 16
Clothing / 20 / 18 / 14 / 8 / 0
  1. What is the maximum amount of food this economy can produce? How much clothing can it produce at this point?
  2. If the economy is producing at alternative C, what is the cost of one more unit of food?
  3. If the economy is producing at alternative C, what is the cost of one more unit of clothing?
  4. Is this economy subject to the law of increasing opportunity costs? How can you tell?
  5. Suppose the economy is currently producing 4 units of food and 16 units of clothing. Is this economy producing efficiently?

Problem #3:

Suppose you have KWD 15 on a lotto ticket at the local and decided to spend all the winnings on candy bars and bags of peanuts. The price of candy bars is KWD 0.75 and the price of peanuts is KWD 1.50.

  1. Construct a table showing the alternative combinations of the two products that are available.
  2. Plot the data in your able as a budget line in a graph. What is the slope of the budget line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do these opportunity costs rise, fall, or remain constant as each additional unit of the product is purchased.
  3. How, in general, would you decide which of the available combinations of candy bars and bags of peanuts to buy?
  4. Suppose that you had won KWD 30 on your ticket, not KWD 15. Show the KWD 30 budget line in your diagram. Why would this budget line be preferable to the old one?

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