Chapter 10 answer keys for the principle of microeconomics 8th edition PDF

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Answer Key, Principles of Microeconomics, 8e – Chapter 10

CHAPTER TEN

Answers to Test Your Understanding Questions

1. a) Freedonia should specialize in beer and Libraland should specialize in wine. b) See the following table:

Beer

Wine

Freedonia

40

10

Libraland

30

40

Totals

70

50

Beer

Wine

Freedonia

80

0

Libraland

0

80

Totals

80

80

c) See the following table:

The gains from trade therefore are 10 beer and 30 wine.

2. See the following tables: Freedonia: Output A

B

C 1

D

E

F

Answer Key, Principles of Microeconomics, 8e – Chapter 10

Apples

50

40

30

20

10

0

Pears

0

4

8

12

16

20

Freedonia’s present combination is C. Libraland: Output A

B

C

D

E

Apples

16

12

8

4

0

Pears

0

12

24

36

48

Libraland’s present combination is C.

3. a)

See the following table:

Before specialization:

Apples

Pears

Freedonia

30

8

Libraland

8

24

Totals

38

32

Apples

Pears

b) See the following table:

After specialization:

2

Answer Key, Principles of Microeconomics, 8e – Chapter 10

Freedonia

50

0

Libraland

0

48

Totals

50

48

c) The gains from trade, therefore, are: 12 apples (50 – 38) and 16 pears (48 – 32).

4. 1 pear = 2.5 apples:

not feasible.

1 pear = 1 apple:

not feasible.

1 pear = 1.75 apples:

feasible.

(In Freedonia 1 apple costs 0.5 pears and 1 pear costs 2 apples. In Libraland 1 apple costs 0.67 pears and 1 pear costs 1.5 apples. Therefore, the terms of trade must be between 1 apple = 0.5 to 0.67 pears (or 1 pear = 1.5 to 2 apples).

5. 160 beans. (As combination C in Table 10.6 shows, if the US produces 240 bushels of wheat, it could also produce 160 beans.)

If instead, the US traded a surplus of 160 wheat, at terms of trade of 1 wheat = 2 bean, it would obtain in return 320 beans. If the terms of trade were 1 wheat = 3 beans, it could obtain 480 beans for its surplus 160 wheat.

6. 6 million litres produced in Germany and 12 imported.

(In the total market the new equilibrium price would be $7 and the quantity would be 29. At this price, 6 would be produced by German wine makers, and since the demand in Germany is now 18, a total of 12 would be imported from France.)

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Answer Key, Principles of Microeconomics, 8e – Chapter 10

7

a) Some in Ontario might argue that the auto industry is a strategic industry; Prairie farmers might suggest farming; West Coast residents might argue for the lumber, or in general, resource industries. b) Perhaps the movie or fuel cell industry or many other high- tech industries; c) Television or radio broadcasting, airlines or perhaps post secondary education. d) Fisheries, the water supply and agricultural industries are particularly at risk from the lowering of environmental standards.

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Answer Key, Principles of Microeconomics, 8e – Chapter 10

Answers to Connect Study Problems

1. Average price of exports: 1.26 (This can be calculate from the formula: X/ 1.4 = 0.9; therefore, X = 1.4 x 0.9.)

2. Pummies: In Onara cost: 0.6 kilos of clings (compared to a cost of 1.5 in Traf). Clings:

Traf; cost: 1.5 kilos of pummies (compared to 1.66 in Onara).

3. a) 1 cloth = 0.5 computers (50/100); 1 computer = 2 cloth (100/50).

b) 1 cloth = 2 computers (120/60);

1 computer = 0.5 cloth (60/120).

c) Here: cloth (Cloth costs only 0.5 computers in Here but costs 2 computers in There). There: computers (Computers cost 2 cloth in Here but only 0.5 cloth in There).

d) 1 unit of cloth: 1 computer:

0.5 to 2 computers

(Between the costs in each country)

0.5 to 2 cloth.

(Between the costs in each country)

4. a) See the following table:

Machines

Bread

Yin

40

200

Yang

60

40

Totals

100

240

5

Answer Key, Principles of Microeconomics, 8e – Chapter 10

b)

Yin: bread (which costs 1/5 machines but costs 1 ½ machines in Yang); Yang: machines (which costs 2/3 bread but costs 5 bread in Yin).

c) Machines

Bread

0

400

Yang

120

0

Totals

120

400

Machines

Bread

20

160

Yin

d)

5. a) Concordia:

1 unit of pork costs 5 beans (An increase in 1 pork causes a fall in beans of 5). 1 unit of beans costs 1/5 (0.2) pork .... Harmonia: 1 unit of pork costs 3 beans (An increase in 2 pork causes a fall in beans of 6). 1 unit of beans costs 1/3 (0.333) pork

b)

Concordia: beans ( Beans cost only 0.2 pork in Concordia compared to 0.333 pork in Harmonia.) Harmonia: pork (Pork costs only 3 beans in Harmonia compared to 5 beans in Concordia).

c)

Pork: 0 (Before they produced a total of 8 pork (2+6). Now Harmonia produces all 8). 6

Answer Key, Principles of Microeconomics, 8e – Chapter 10

Beans: 4 (Before they produced a total of 16 beans (10+6). Now Concordia produces 20 beans. d)

Feasible terms of trade: 1 pork: 3 – 5 beans (or 1 bean: 1/5 – 1/3 pork)

6. a) import mangos, since the domestic demand exceeds domestic production.

b) 120 cases of mangos. (The quantity supplied at a price of $16.)

c) Import 60 cases of mangos. (The difference between quantity supplied of 120 and quantity demanded of 180).

d) Since the quantity supplied at $28 exceeds the quantity demanded, India will export the difference of 120 cases.

7. a) Price: $2200;

domestic production: 120 tons.

b) Domestic production: 90;

imports: 40.

(At a world price of $2000, domestic production is only 90, therefore the deficiency of demand must come from imports)

c) Price: $2100;

domestic production: 105 tons.

(The total supply becomes the domestic supply plus 20. The new equilibrium price is $2100 and at that price domestic production is 105.)

d) Tariff: $100;

Tariff revenue: $2000.

(To ensure domestic production of 105, the price needs to be $2100. Since the world price is $2000, the Canadian 7

Answer Key, Principles of Microeconomics, 8e – Chapter 10

government needs to levy a tariff of $100. Total tariff revenue therefore equals 20 (the amount of imports at $2100) x $100 or $2000

8

Answer Key, Principles of Microeconomics, 8e – Chapter 10

8.

a) and b See the following figure:

Figure 10.15 (Completed) A Canada

50

DV Ds

45 40 35

New combination

30 25 PP curve

20

Trading possibilities curve

15 10 combination C

5 0 0

5

10

15

20

25

30

35

Quantity of wheat per period

B Japan

9

40

45

50

Answer Key, Principles of Microeconomics, 8e – Chapter 10

50 45 D V Ds

40 35

New combination

30 25 20

Trading possibilities curve

15 10

combination C

5

PP curve

0 0

5

10

15

20

25

30

35

Quantity of wheat per period

10

40

45

50

Answer Key, Principles of Microeconomics, 8e – Chapter 10

c) 5 DVDs. (Previously it had 20W and 15DVDs. It could now have 20W and 20DVDs)

d) See Figure 10.15A.

e) 10 wheat. (Previously it had 10W and 20DVDs. It could now have 20W and 20DVDs)

f) See Figure 10.15A.

9. 2 sardines. (So that the comparative costs are the same in each country, i.e. 1 sardine = 1 ½ bread.)

10. a) Price: $15 000;

quantity: 120 000.

b) See the following table:

Table 10.18 (Completed)

Quantity Demanded

Quantity Supplied

Quantity supplied

(before tariff)

(after tariff)

12 000

180

60

20

13 000

160

80

40

14 000

140

100

60

15 000

120

120

80

16 000

100

140

100

17 000

80

160

120

Price ($)

11

Answer Key, Principles of Microeconomics, 8e – Chapter 10

18 000

60

180

140

19 000

40

200

160

(The supply column slips down 2 places. Suppliers would now supply the same quantity at $14 000 (including a $2000 tariff) as they did when the price was $12 000 with no tariff.)

c) Price: $16 000;

quantity: 100 000.

d) Total revenue: $200 million ($2000 x 100 000).

e) Price: $16 000; quantity: 100 000. (Assume that the supply is a constant 100 (000) irrespective of the price).

f) No

12

Answer Key, Principles of Microeconomics, 8e – Chapter 10

11. a) and d)

See the following figure:

Figure 10.16 (Completed)

b) Latalia should specialize in rice.(Wool costs Latalia 1200/480 or 2.5 rice per unit of rice. It can however buy 1 unit of wool for 2 rice internationally. So it should buy its wool from abroad and sell its rice.)

c) 60 more bushels of wool. (Before, it had 240 wool and 600 rice. Now it can have 300 wool and 600 rice.)

12. a) In Alpha, 1 unit of wheat costs 2 beans. In Beta, 1 unit of wheat costs 0.5 beans. In Gamma, 1 unit of wheat costs 1 bean.

b) Beta can produce wheat the cheapest.

13

Answer Key, Principles of Microeconomics, 8e – Chapter 10

c) Alpha can produce beans the cheapest.

d) Beta would export wheat; Alpha and Gamma would import wheat.

e) Beta and Gamma would export wheat; Alpha would import wheat.

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Answer Key, Principles of Microeconomics, 8e – Chapter 10

13. a) See the following table:

Table 10.20 (Completed)

Price

DC

DW

DT

SC

SW

ST

$25

200

1200

1400

20

1200

1220

50

180

1100

1280

30

1250

1280

75

160

1000

1160

40

1300

1340

100

140

900

1040

50

1350

1400

125

120

800

920

60

1400

1460

150

100

700

800

70

1450

1520

175

80

600

680

80

1500

1580

200

60

500

560

90

1550

1640

225

40

400

440

100

1600

1700

b) Price: $50;

quantity: 1280. Where DT = ST)

c) Price: $175; quantity: 80. (Where DC = SC)

d) Quantity imported: 150. At the world price of $50, the Canadian supply of 30 is less than the quantity demanded in Canada of 180. The difference would be supplied from imports.

e) Price: $100; quantity 140. Since imports are restricted the SW column is in effect a constant 90. At a price of $100, the total quantity supplied will be 50 (Canadian suppliers) + 90 (imports) which equals the quantity demanded.

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Answer Key, Principles of Microeconomics, 8e – Chapter 10

Answer to Comprehensive Problem

a) 1 bushel of wheat = ½ barrels of wine. (A worker in Richland can produce either 4 bushels of wheat or 2 barrels of wine. The opportunity cost of 4 wheat is therefore 2 wine. The cost of 1 unit of wheat = 2/4 or ½ wine.)

b) 1 barrel of wine = 2 wheat. (To find the cost of 1 unit of wine, simply take the reciprocal of the wheat cost (i.e., just invert the number). This gives a cost of 1 wine = 2 wheat.)

c) 1 bushel of wheat = 3 barrels of wine. (In Prosperity, a worker can produce either 2 wheat or 6 wine. The opportunity cost of 2 wheat is therefore 6 wine. The cost of 1 unit of wheat = 3 wine.)

d) 1 barrel of wine = 1/3 (o.333) bushels of wheat. (To find the cost of 1 unit of wine take the reciprocal of the wheat cost. This gives a cost of 1 wine = 1/3 wheat.) e) Richland: wheat. ( It can produce wheat cheaper than can Prosperity.)

f) Prosperity: wine (It can produce wine cheaper than can Richland.)

g) To figure out the production possibilities data for Richland, start at combination E where no wheat is produced. All the labour (10 million) must be employed producing wine, and since each worker can produce 2 barrels of wine, total output = 20 million barrels. Moving to combination D, which represents an additional 10 units of wheat, you know that each unit of wheat costs 1/2 wine. Therefore an additional 10 units of wheat will cost 10 x 1/2 or 5 wine, so that production of wine 16

Answer Key, Principles of Microeconomics, 8e – Chapter 10

drops to 15. In general, moving from right to left on the production possibilities table, implies that each extra 10 wheat costs 5 wine.

Now do a similar exercise with Prosperity’s production possibilities data and note that since 1 wine costs 1/3 wheat, that each additional 15 wine costs 15 x 1/3 or 5, wheat. This gives us the following table: Table 10.22 (Completed) Richland’s Production Possibilities (in millions of units) A B C D Wheat 40 30 20 10 Wine 0 5 10 15

E 0 20

Prosperity’s Production Possibilities (in millions of units) A 20 0

Wheat Wine

B 15 15

C 10 30

D 5 45

E 0 60

h) This requires that you copy combinations C from the two production possibilities tables above and total them:

Table 10.23 (Completed)

Total output in millions of units:

Wheat Wine Richland

20

10

Prosperity

10

30

Total: both countries 30

40 17

Answer Key, Principles of Microeconomics, 8e – Chapter 10

i) Since you’ve already decided that Richland will specialize in the production of wheat, the production possibilities table above shows the country’s maximum wheat production (combination A). Similarly, Prosperity will specialize in wine production and its maximum is shown as combination E in its PP table. This gives us:

18

Answer Key, Principles of Microeconomics, 8e – Chapter 10

Table 10.24 (Completed) Total Output in millions of units:

Wheat Wine Richland

40

0

Prosperity

0

60

Total: both countries 40

60

j) 10 wheat and 20 wine This requires you to simply subtract the pre-trade totals, shown in h) from these new totals resulting from specialization. k) As a result of specialization, Prosperity is producing 60 wine. If it trades away 12, it will be left with 48 wine and in exchange for those 12 wine will receive 12 x 1.5 wheat = 18 wheat. Richland, in return will receive these 12 wine and pay 18 wheat. Since it produced 40 wheat, it will be left with 40 − 18, or 22 wheat.

The gains for each country, therefore are (in millions of units):

Table 10.25 (Completed)

Wheat Wine Richland

2

2

Prosperity

8

18

Total: both countries 10

20

19

Answer Key, Principles of Microeconomics, 8e – Chapter 10

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