Part 1: Answer if the statement is true or false and provide brief reasoning beh
ID: 1176212 • Letter: P
Question
Part 1: Answer if the statement is true or false and provide brief reasoning behind your answer in
words/graphs/math.
(1) Land in residential areas is a scarce resource, because it has a price, while land in public parks is
not scarce, because it is owned by a city.
(2) Production possibilities frontier shows how many resources a firm has and how it allocates them.
(3) Opportunity cost reflects the quantity of capital and labor that went into the production of a good.
(4) According to supply and demand equilibrium model, snowboards are likely to become more
expensive in winter, and their sales will increase.
Part 2: Answer the questions. Explain your answers concisely.
1. Economic Model
Bankrupt American Airlines has approved merger with US Airways. The new company, with 950 planes
and 94,000 employees, would be based in Fort Worth. Airline consolidation may sound ominous to
consumers who have benefited from competitive airfares, but now expect the prices to increase. Other
Airlines, like Southwest and JetBlue are likely to show particular interest in grabbing more passengers at
some of the nation's airports.
(a) How does this story fit into the circular flow model? Identify as elements of the model: American,
US Airways, 950 planes, 94000 employees, fliers and flights, airfares, Southwest, JetBlue.
(b) Draw the circular flow diagram. Identify and position all types of agents, factors, goods, markets
and prices.
(c) If one airline buys another from its shareholders, does that mean that the firm doesn't owe any
more capital to households? Explain briefly.
2. Production Possibilities Frontier (PPF)
The hot summer of 2012 brought the worst drought since 1930's. Usually the harvest of corn becomes an
input to food industry and fuel industry. With smaller harvest, some fuel distillers chose to drop out of
competition temporarily. Poet LLC, the second-biggest U.S. ethanol producer, Valero Energy Corp., the
third-largest, and Abengoa SA, are among companies that have idled operations.
(a) Analyze the situation using PPF. Draw the curve, label the output(s), identify input(s).
(b) Show how smaller harvest of corn affected the production possibilities in the US.
(c) Indicate on the graph approximate outputs before (point A) and after (point B) the drought and
shutdowns of fuel ethanol distillers happened.
3. Opportunity Cost
Time Warner Inc. is considering a deal that would send most of its magazines to Meredith Corp., putting
titles such as People and Entertainment Weekly in the hands of Iowa-based publisher of Better Homes
and Gardens. The move would let Time Warner offload a part of its worst-performing major division,
helping insulate the company from an industrywide slump in advertising sales and focus on cable and
other media divisions.
(a) Draw PPF, label outputs: ad space and cable. Indicate the opportunity cost of cable on the graph,
write down its measurement unit.
(b) Show on the graph how Time Warner sold some of its magazines (along with ad space in them)
to concentrate on providing cable services.
2
(c) If Time Warner decided to concentrate on the cable, how did the opportunity cost of cable
compare to its relative market price? How will it compare after Time Warner optimizes its
production?
4. Markets
Wal-Mart Stores Inc. and Gap Inc. are meeting with retailers, industry associations and the Bipartisan
Policy Center to develop a plan to improve fire and safety regulation in Bangladesh factories.
(a) Think of the jobs market in Bangladesh, where Gap and wal-Mart are the demand, and workers are
the supply. Then market equilibrium determines wage and quantity of workers hired. If public pressure will
lead to the adoption of the minimum wage for the sweatshop workers, what do you expect to happen to
market efficiency? Depict the market failure on a graph.
(b) If the fire safety systems will add additional costs to Gap's business, what do you expect to happen to
quantities and prices of Gap apparel sold in the US?
Explanation / Answer
1 TRUE.
2 TRUE-BECAUSE PPF IS A CURVE WHICH DEPICTS ALL POSSIBLE COMBINATIONS OF TWO GOODS THAT AN ECONOMY CAN PRODUCE WITH AND FULL AND EFFICIENT UTILISATION OF GIVEN RESOURCES AND STATE OF TECHNOLOGY
3 FALSE OPPORTUNITY COST IS DEFINED AS THE BENEFIT LOST INTERMS OF THE NEXT BEST ALTERNATIVE FOREGONE WHEN A CHOICE IS MADE
4 TRUE-IN WINTERS DEMAND FOR SNOWBOARDS IS HIGHER SO THERE IS INCREASE IN THEIR PRICE . WHEN THE PRICE INCREASES SUPPLY OF SNOWBOARDS ALSO INCREASES.