Macro Project Revise Answers and Fill In Incomplete Ones, $

Welcome to Macroeconomics in Middle Earth!

Part 1*

The Shire, a country inhabited by hobbits, has a simple life and a simple economy. Life is based on the good earth and there, gardeners are held in high esteem. Forty leagues it stretches from the Fox Downs to the Brandywine Bridge, and fifty from the western moors to the marshes in the south. There in that pleasant corner of the world they ply their well-ordered business of living, and they heed less and less the world outside where dark things move. They have come to think that peace and plenty are the rule in Middle-Earth and the right of all sensible folk.

Section 1

a) The Shire produces two goods—taters and pipeweed. If all resources are used to produce taters, 1,000 tons per day can be produced. If all resources are used to produce pipeweed (a unique plant used for smoking in pipes and producing great smoke rings), 100 barrels per day can be produced. Draw the shire’s PPF for taters and pipeweed. Show the slope of the PPF. Calculate the opportunity costs for both taters and pipeweed.

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*Quotes from The Lord of the Rings, or The Hobbit by JRR Tolkien. Nothing written in italics applies to the questions—it’s there just for Tolkien fun. Go forth and read!!!

b) Lady Galadriel the Elf makes magic soil available which increases the production of both taters and pipeweed by 50 percent. Draw the new PPF for the Shire. Show the slope of the PPF. Calculate the new opportunity costs for both taters and pipeweed. Make your changes from the prior question.

c) Gandalf the wizard enjoys smoking pipeweed so much he puts a spell on the tobacco plants so that they double in size and produce twice as much. Draw the new PPF for the Shire. Show the slope of the PPF. Calculate the new opportunity costs for both taters and pipeweed. Make your changes from the prior question.

d) Saruman’s Uruk-Hai invade the Shire and destroy half the arable land. The uruks are finally driven out of the Shire by the very large (for hobbits) Meriadoc Brandybuck and Peregrin Took. Draw the new PPF for the Shire. Show the slope of the PPF. Calculate the new opportunity costs for both taters and pipeweed. Make your changes from the prior question.

Section 2

Hobbits love to eat and smoke their pipes. As for the hobbits of the Shire, ... in the days of their peace and prosperity they were a merry folk. They dressed in bright colours, being notably fond of yellow and green; but they seldom wore shoes, since their feet had tough leathery soles and were clad in a thick curling hair, much like the hair of their heads, which was commonly brown....Their faces were as a rule good-natured rather than beautiful, broad, bright-eyed, red-cheeked, with mouths apt to laughter, and to eating and drinking. And laugh they did, and eat, and drink, often and heartily.....

There they saw close beside them a great rubble-heap; and suddenly they were aware of two small figures lying on it at their ease....One seemed asleep; the other, with crossed legs and arms behind his head, leaned back against a broken rock and sent from his mouth long wisps and little rings of thin blue smoke.

The Shire would like to consume more taters and pipeweed than it currently has. Farmer Cotton and old Gaffer Gamgee are two of the best farmers in the Shire (the Gaffer taught his son Samwise everything he knows). Farmer Cotton can produce 2 barrels of pipeweed a day or 3 tons of taters. The Gaffer can produce 2 barrels of pipeweed or 4 tons of taters (he is regarded as an expert in the matter of the growing of roots, especially potatoes).

a) Calculate the opportunity costs for each farmer for each product (need 4 answers).

b) Draw the PPFs for Farmer Cotton and Gaffer Gamgee. Show the slope of each PPF.

c) Should either farmer specialize, and if so, in what product? Why?

d) What will be the terms of trade for taters in terms of pipeweed? For pipeweed in terms of taters?

Section 3

The town of Bree is the center for pipeweed trade in the northwest of Middle Earth. Trading is conducted at the Inn of the Prancing Pony, specializing in the high quality Longbottom Leaf from the South Farthing.

For Bree stood at an old meeting of ways; another ancient road crossed the East Road just outside the dike at the western end of the village, and in former days Men and other folk of various sorts had travelled much on it.     The Prancing Pony was a meeting place for the idle, talkative, and inquisitive among the inhabitants, large and small, of the four villages; and a resort of Rangers and other wanderers, and for such travellers (mostly dwarves) as still journeyed on the East Road, to and from the Mountains.

a) Draw demand and supply for the Bree pipeweed market. Show the equilibrium price and quantity.

b) A large party comes up from Isengard in the south to participate in the pipeweed market. Draw what happens in the Bree market. Show three separate pipeweed market scenarios—one with a higher equilibrium price, one with a lower equilibrium price and one with the same equilibrium price. What is the determinant in each case? Do 3 graphs. Don’t make up determinants.

c) Nine nasty black horsemen trample most of the pipeweed crop in the South Farthing of the Shire, the main growing center for tobacco leaf. Draw what happens in the Bree pipeweed market. What happens to the equilibrium price and quantity?

d) The Thain of the Shire placed a price ceiling on pipeweed below the equilibrium price. Draw the pipeweed market showing market price, equilibrium price, quantity demanded and quantity supplied. What condition in the market results from the price ceiling and how would you calculate it? How much is actually exchanged in the market?

e) Draw what happens in the market for pipes as a result of c). What happens to the equilibrium price and quantity of pipes? Explain why with precise determinant.

f)

Section 4