Practice Problems for MidtermOctober 4, 20121. (a) Assuming the following Production Possibilities Table, what isthe opportunity cost of producing one more unit of Guns if we are currentlyproducing 2 units of Guns and 9 units of Butter?Table 1: Production Possibilities TableGuns Butter0 121 112 93 74 45 0(b) What is the opportinity cost of producing one more unit of Butter ifwe are currently producing 3 units of Guns and 6 units of Butter?(c) In part (b) what region(s) of the PPF graph is the original point (3, 6)?2. (a) The demand curve for kegs of Natural Light beer is k = 1000 − 2p.The supply curve for kegs of Natural Light beer is k = −200 + 10p. Supposethe benevolent ABC dictator sets a price ceiling of $75 for Natural Light kegs(it is illegal to sell Kegs of Natty for more than $75). What is the price inthe Natty keg market under the price ceiling? The quantity supplied? Thequantity demanded? and the quantity sold? (b) What if the price ceiling is$125? (Graphs may be helpful, but this problem involves doing algebra)1(c) Is the market in part (a) in surplus or shortage? What about themarket in part (b)?3. Given the following table of Nominal GDP and price levels calulcatereal GDP growth between between the two years.Table 2: GDPYear Nominal GDP Price Index2010 14735 1112011 15321 1144. The economy of the Shire in Middle Earth is poulated with 1200 Hob-bits. 5% of the poulation are unemployed and 57.5% of the population isemployed. What is the unemployment rate and the labor force participationrate in the Shire?5. In the Solow Models, what two key properties does the aggregate pro-duction function exhibit?6. In Modern Growth theory what are the three sources of economicgrowth?7. Use the AS/AD model to show the impact of a hurricane that ravagesthe golf coast. Be sure to indicate which curve(s) shift and in what direc-tion(s), and indicate both short run and long run changes in price level, realGDP, and unemployment. Compare all changes to the initial equilibrium.8. When conducting fiscal policy, what are the two things that the gov-ernment can use to influence aggregate
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