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Macroeconomics | Assignment
Instructions: Complete all questions and ensure that submitted work is your own.
Assignments
must be hand written (not typed) and submitted in hard copy only. Students can submit
their
assignments either during their feedback forum (falling on or before the due date) or else
submit
their assignments into the Economics, Finance and Marketing Assignment Submission Box
in
Building 108. The assignment is optional, no extensions under any circumstances will be
granted.
The assignment is due on Wednesday 7 September.
(a) Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes
and
catch fish. The accompanying table shows the maximum annual output combinations of
potatoes and fish that can be produced.
Production Alternatives Quantity of Potatoes (kg) Quantity of Fish (kg)
A 1,000 0
B 800 300
C 600 500
D 400 600
E 200 650
F 0 675
i. Draw a production possibilities frontier that corresponds with the data in the table.
ii. Can Atlantis produce 500 kilograms of fish and 800 kilograms of potatoes? Explain.
Where would this point lie relative to the production possibilities frontier?
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iii. What is the opportunity cost of increasing the annual output of potatoes from 600 to 800
kilograms?
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Illustrate
Page 2
iv. What is the opportunity cost of increasing the annual output of potatoes from 200 to 400
kilograms?
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v. Why are the answers to parts iii and iv not the same? What does this imply about
opportunity costs?
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(b) Government survey takers determine that typical family expenditures each month in the
base
year (2010) are as follows:
20 pizzas at $10 each; Rent of apartment, $600 per month; Petrol and car maintenance,
$100;
Phone service $50
In the following year (2011), the survey takers determine that pizzas have risen to $11 each,

2. apartment rent is $640, petrol and car maintenance has risen to $210, and phone service
has
dropped in price to $40.
i. Find the CPI for 2011 and the rate of inflation between the two years
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ii. The family’s nominal income rose by 5% in 2011. Are they worse off in terms of what
their income is able to buy?
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(c) Use the economic data given to find national savings, private savings, public savings and
the
national saving rate (national savings as a proportion of GDP) in a closed economy.
i. Case 1
GDP = 6000
Tax collections = 1200
Government transfer payments = 400
Consumption expenditure = 4500
Government budget surplus = 100
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Page 3
(d) Using demand and supply, illustrate the following situations
i. Market for umbrellas (on rainy days): A store owner finds that customers are willing to
pay more for umbrellas on rainy days.
ii. Market for leather shoes: The cost of leather increases dramatically, resulting in a
smaller quantity of leather shoes being purchased by consumers.
iii. Market for airline travel: Deregulation of the airline industry allows more airlines to enter
the market, reducing the cost of air travel.
iv. Market for petrol: The sharp rise in the price of oil leads many consumers to reducing
their petrol purchases.
(e) Compute how much each of the following items is worth in terms of today's dollars using
177
as the price index for today.
i. In 1926 the CPI was 17.7 and the price of a movie ticket was $0.25.
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_
ii. In 1932 the CPI was 13.1 and a cook earned $15.00 a week.
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_
(2+1.5+0.5+0.5+1.5) + (2+1) + 4 + 6 + 1 = 20
Illustrate (iii)
Illustrate (i) Illustrate (ii)
Illustrate (iv)
Assignment
a)
i) Production Possibilities Curve

3. ii) No, Atlantis cannot produce 500 Kg of fish and 800 Kg of potatoes because the available
resources and given state of technology renders this combination unaffordable for Atlantis
to produce. This is shown by combination G in the PPC drawn below.
iii) The opportunity cost of increasing the annual output of potatoes from 600 to 800
kilograms is 200 fish.
iv) The opportunity cost of increasing the annual output of potatoes from 200 to 400
kilograms 50 fish.
v) Answers in Part (iii) and (iv) are not same because of the difference in opportunity cost.
As we move down the production possibility curve, opportunity cost increases. Since the
resources are limited goods have to be produced using the given resources and the state of
technology. To use more of one resource the other has to be sacrificed.
b)
i) Consumer expenditure in year 2010:
20 pizza @$10 each =200

4. Rent of apartment =600
Petrol & car maintenance =100
Phone services = 50
Total =950
Consumer expenditure in year 2011:
20 pizza @$11 each =220
Rent of apartment =640
Petrol & car maintenance =210
Phone services = 40
Total =1110
Consumer price index for 2011= (1110/ 950) X100
= 116.84
Rate of inflation between these two years
= [(Price in current year- price in base year)/ price in base year] X 100
= 16.84
ii) If the family’s income rose by 5% the family is worse off in terms of what their income can
buy as it is still lower than the rate of inflation which is around 16%.
c) Private saving = Disposable income - Consumption expenditure
= Income – taxes + transfer payments – consumption expenditure
= 6000 – 1200 + 400 – 4500
= 700
Public saving = Government budget surplus
= 100
National savings = Private saving + Public saving
= 700 + 100
= 800
National saving rate (%) = (National savings/GDP) x 100

5. = (800/6000) x 100
= 0.13 x 100
= 13 %
d)
i)
ii)
iii)
iv)

6. e)
i) Cost of movie ticket today= (CPI for today/ CPI for 1926)X Cost of movie ticket in1926
= 177/17.7X0.25
=$ 2.5
ii) Income of cook today = (CPI for today/ CPI for 1932)X Cost of movie ticket in1926
=177/13.1 X 15
=$ 202.50