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- Assume the price of bananas is $3 (per pound) and the price of apples is $5

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1. Assume the price of bananas is $3 (per pound) and the price of apples is $5 (per pound). What is the relative price of bananas? What does this measure? ($750)

2. Suppose there are 30,000 hours of labor available in Chile and that 6 hours of labor are required to produce one unit of candy, while 5 hours are required to produce one unit of soda. Graph the PPF for this country. Place candy on the vertical axis and soda on the horizontal. Use this to answer questions.

A) What is the maximum amount of candy and soda Chile can produce? ($500)

B) Draw a graph of the PPF using the information above. On your graph, place candy on the vertical axis and soda on the horizontal axis. Be sure to label the axes, the numerical intercepts and the PPF. Assume the PPF slope is linear. ($500)

Candy

Soda

C) What is the value of the slope? Show workings to get full credit ($500)

D) What does this slope value represent? ($500)

E) What would happen to the PPF if the number of hours available rose from 30,000 to 60,000? Show this on a PPF? ($500)

Soda

3. The economy has 300 units of capital (K) & 300 units of labor (L) and makes t-shirts & cups. The production technology to make 1 unit of:

- T-shirts: requires 3 K or 1 L
- Cups: requires 1 K or 3 L

A) What are the intercepts? Illustrate this on a graph (place t-shirts on the vertical axis; cups on the horizontal axis) ($500)

B) What is the output bundle if we divide K and L evenly between t-shirts & cups? Illustrate this. ($500)

C) What happens to total output if we use only L to make t-shirts and only K to make cups? ($500)

D) Illustrate your answer to part C with a graph. ($500)

E) What happens to opportunity cost as we move towards either end intercept? ($500)

4. Illustrate an autarky equilibrium when a country is subject to increasing opportunity costs. This country can produce 2 goods: apples & bananas.

A) In your graph, include a PPF, budget line and indifference curve. Make sure to label each curve and draw them correctly. Place apples on the vertical axis; bananas on the horizontal axis. ($500)

B) What does the slope of the PPF represent? ($500)

C) What does the slope of the indifference curve represent? ($500)

D) What does the slope of the price line represent? ($500)

E) Summarize the equilibrium in 1-2 sentences ($500)

5. The diagram below shows an autarky equilibrium.

A) Would the economy operate at point W? Why/why not? ($250)

B) Would the economy operate at point L? Why/why not? ($250)

C) Which point(s) represent autarky equilibrium? Why? ($250)

D) If the economy moved from point S to point G, would the standard of living improve? Why/why not? ($500)

E) If the economy moved from point G to point F, would the standard of living improve? Why/why not? ($500)

6. Read this article “Autarky and the free market state, a Korean example” and answer the following questions (a pdf copy of the article is in the Homework 2 folder on ANGEL).

A) Calculate the index of openness for both Korean states. ($500)

B) What do these figures on part A tell us about the importance of trade (globalization) for both states? What impact does this have on economic development? ($1,500)