FRAMINGHAM STATE COLLEGE
PRINCIPLES OF MICROECONOMICS
PROBLEM SET NUMBER 2
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Text Chapter 2: Page 34
3.

Draw a circular-flow diagram.
Identify the parts of the model that Correspond to the flow of goods and services and the flow of dollars for each of the following activities.
a. Sam pays a storekeeper $1 for a quart of milk.
b. Sally earns $4.50 per hour working at a fast food restaurant.
c. Serena spends $7 to see a movie
d. Stuart earns $10,000 from his 10 percent ownership of Acme Industrial.

See Figure 1; the four transactions are shown.

Figure 1
Principles of Microeconomics

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Problem Set Number 2

5.

The first principle of economics discussed in Chapter 1 is that people face tradeoffs. Use a production possibilities frontier to illustrate society's tradeoff between a clean environment and the quantity of industrial output. What do you suppose determines the shape and position of the frontier? Show what happens to the frontier if engineers develop an automobile engine with almost no emissions

See Figure 2. The shape and position of the frontier depend on how costly it is to maintain a clean environment⎯the productivity of the environmental industry. Gains in environmental productivity, such as the development of a no-emission auto engine, lead to shifts of the production-possibilities frontier, like the shift from
PPF1 to PPF2 shown in the figure.

Figure 2

Principles of Microeconomics

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Problem Set Number 2

7.

Classify each of the following statements as positive or normative AND explain why.
a. Society faces a short-run tradeoff between inflation and unemployment.

The statement that society faces a short-run tradeoff between inflation and unemployment is a positive statement. It deals with how the economy is, not how it should be. Since economists have examined data and found that there is
a