Suppose that an economy produces only 2 goods, beer and pizza.

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  1. Suppose that an economy produces only 2 goods, beer and pizza. Show a typical production possibilities frontier for this country and use it to define and explain the opportunity cost concept and the concept of increasing opportunity costs. If a technology was invented that made the production of beer much more efficient but had no effect on the production of pizza how would the production possibilities frontier change (show it). While all points on the production possibilities curves maximize production, which point maximizes satisfaction?
  1. With reference to a diagram, show and explain how a market, left on its own, will tend toward an equilibrium in which there is neither a surplus nor a shortage of the product.
  1. What condition must be met in order to conclude that an economy is maximizing social well-being? Do the equilibriums given by individual markets necessarily lead to the maximization of social well-being (that is, if demand is equal to supply, can you conclude that well-being is maximized)? Explain why/why not making sure to discuss marginal social benefits and costs, marginal private benefits and costs, and demand and supply.
  1. Economists argue that resources flow to their highest valued use insuring, if there are no market failures, a purely competitive market will lead to a well-being maximum. This is referred to as the price or profit system. Explain why economists believe this. That is, explain how the price/profit system works.
  1. List and briefly explain types of barriers to entry that keep the market from reaching a maximum of well-being.

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Exam 1

1.  Suppose that an economy produces only 2 goods, beer and pizza. Define what is

meant by a production possibilities frontier.

2.  Production possibilities curve may be linear (straight line) or bowed from the

origin. What conditions lead to each?

3.  Suppose the country in the first question has resources that are not completely

substitutable. Draw this country’s production possibilities frontier and use it to

define and explain the opportunity cost concept and the concept of increasing

opportunity costs.

4.  If increasing opportunity costs do not exist, what would the production

possibilities curve look like?

5.  Now use the production possibilities frontier from question 3 to show and explain

the difference between general and economic growth.

6.  What is necessary for a country’s production possibilities curve to shift outward?

7.  With reference to a diagram, show and explain how a market, left on its own, will

tend toward an equilibrium in which there is neither a surplus nor a shortage of

the product.

8.  What condition must be met in order to conclude that an economy is maximizing

social well-being? Do the equilibriums given by individual markets necessarily

lead to the maximization of social well-being (that is, if demand is equal to

supply, can you conclude that well-being is maximized)? Explain why/why not

making sure to discuss marginal social benefits and costs, marginal private

benefits and costs, and demand and supply.

9.  Economists argue that resources flow to their highest valued use insuring, if there

are no market failures, a purely competitive market will lead to a well-being

maximum. This is referred to as the price or profit system. Explain why

economists believe this. That is, explain how the price/profit system works.

10. With reference to a diagram, show and explain how a market, left on its own, will

tend toward an equilibrium in which there is neither a surplus nor a shortage of

the product.

11. List and explain the importance of each of the five characteristics of purely

competitive markets.

12. What role do profits (and losses) serve in a market economy.

13. Consider the markets for pizza and fried chicken. Show graphically and explain

the impact(s) you would expect if technological change leads to the development

of a pizza oven that is both much cheaper and uses less energy than current ovens.

14. Intuitively explain what a positive income elasticity of demand means.

15. Suppose a vaccine is developed that prevents those who have had the vaccine

from either contracting HIV-AIDS or giving it to others. Will a free market

produce the socially optimally quantity of the vaccine? Explain. If you think not,

what corrective action would you recommend for government?

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