Answer key to sample problems for test 2

Here is the key to the sample test. I will try to be online for a while this evening but I'm not feeling that great so I'm sorry if I don't show up or only on for a short time.

1-B, 2-A, 3-A, 4-D, 5-A, 6-B,
7-D, 8-B, 9-B, 10-B,
11-D, 12-C, 13-C, 14-B, 15-C,
16-B, 17-A, 18-C, 19-A, 20-A, 21-A, 22-D, 23-C,
24-D, 25-A, 26-B, 27-D,
28-C, 29-B, 30-A, 31-C,
32-B, 33-B, 34-C, 34(second one)-E, 35-B, 36-B, 37-C,
38-B, 39-A, 40-A, 41-B, 42-D,
43-C, 44-D, 45-C, 46-C, 47-C, 48-B, 49-C,
50-A, 51-C, 52-B, 53-B, 54-A or D*

*Comment on #54. The demand for milk will certainly increase, driving up the price and quantity. The effect on the supply side could be debatable. In microeconomic analysis of a firm supply of a good, it is discovered that the supply decision is based only on marginal cost. Here you are told there is a costly advertising campaign. Does the cost of an advertising campaign vary with the level of output or is it a "fixed" or "one time" cost? If this is (and arguably could be) more like a fixed cost, the supply decisions would not change (and supply would not move) and the answer would be A. However, if you argue that the supply would decrease then unambiguously price will rise but the combined effect of decrease in supply and increase in demand would leave us uncertain about equilibrium quantity. This is a tough argument and if appeared on a test, I would accept both. But I hope to avoid such unclear problems on a test. (Sorry.)



Here is the answer for the PPF problem:

You can plot the PPF by treating the combinations of Truck and Corn as "ordered pairs" on the diagram.

A. 10 bushels, 15 bushels, 20 bushels, 25 bushels

B. Opportunity cost is increasing.

C. The combination is feasible but inside the limits of the PPF. The economy is not using its resources efficiently or there is some unemployment and other idle resources.

D. The combination is not feasible. It lies outside the PPF. The way to get to that production point is more resources or better technology. (Be careful, you can trade to get a consumption bundle outside of the PPF, however, the question clearly asks if it is a possible production point. Trade does not enter into this answer.)

Let me know if you think any of these answers is incorrect. There could be a typo or I could have just done the problem wrong.

Good luck.