Microeconomics - ECO 411

Assignment 1 - Fall 2018 (25 Marks)

Due date: Thursday, 8th February 2018, 4:30 pm

1. Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops. Suppose
that Brazil’s production possibilities for ethanol and food crops are as follows:

a. What is a production possibility frontier (PPF) of an economy? What is its importance and use? (2 Marks)
b. What is the concept of opportunity cost? Explain and give a simple example. (2 Marks)
c. Draw a graph of Brazil’s PPF with food crops on the x-axis and explain how your graph illustrates
scarcity. (2 Marks)
d. Why does Brazil face a tradeoff on its PPF? (2 Marks)
e. Is it possible for Brazil to produce 54 barrels of ethanol and 1 ton of food per day? What will producing
at this point imply for Brazil? Can Brazil increase its production of food to 3 tons but continue to produce
54 barrels of ethanol? Use your PPF to explain your answer clearly. (2 Marks)
f. If Brazil produces 40 barrels of ethanol a day, how much food must it produce to achieve production
efficiency? Explain why this point is productively efficient. Are there other points on the PPF that are
productively efficient? (2 Marks)
g. If Brazil increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the
opportunity cost of the additional ethanol? (1 Marks)
h. If Brazil increases its production of food crops from 2 tons per day to 3 tons per day, what is the
opportunity cost of the additional food? (1 Marks)
i. Does Brazil face an increasing opportunity cost of ethanol? What feature of Brazil’s PPF illustrates
increasing opportunity cost? (1.5 Marks)
j. Under what conditions could Brazil continue to produce 54 barrels of ethanol, but also produce 3 tons of
food? Explain how this would affect the PPF drawn in part (c)? (1.5 Marks)
k. Define marginal cost and calculate Brazil’s marginal cost of producing a ton of food when the quantity
produced is 2.5 tons per day. (1.5 Marks)
l. Define marginal benefit, explain how it is measured, and explain why the data in the table does not
enable you to calculate Brazil’s marginal benefit from food. (1.5 Marks)
m. Distinguish between production efficiency and allocative efficiency. Explain why many production
possibilities achieve production efficiency but only one achieves allocative efficiency. (2 Marks)
n. Suppose that Brazil produces at a point such that productive and allocative efficiency is achieved. Does
this imply that Brazil has achieved economic efficiency? Explain your answer clearly. (3 Marks)