Econ-HW2 - Homework assignment and great study guide for principles of microeconomics. PDF

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Homework assignment and great study guide for principles of microeconomics. ...

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Homework 2 Due 9/12/17

Chapter 3 Interdependence and the Gains from Trade 1) Economists use the term absolute advantage to refer to the ability to produce a good using fewer inputs than another producer. 2) Economists use the term comparative advantage to refer to the ability to produce a good at a lower opportunity cost than another producer. 3) Charlotte can produce pork and beans and can switch between producing them at a constant rate. If it takes her 10 hours to produce a pound of pork and 5 hours to produce a pound of beans, what is her opportunity cost of pork and what is her opportunity cost of beans? Her opportunity cost of pork is 2 pounds of beans, and her opportunity cost of beans is ½ a pound of pork. 1 pound of pork = 10 hours.  could make 2 pounds of beans. 1 pound of beans = 5 hours.  could make ½ a pound of pork. In 10 hours she could produce 1 pound of pork or 2 pounds of beans. 4) Frank can make 20 hot dogs an hour or 10 pints of potato salad an hour. Earnest can make 30 hot dogs an hour or 20 pints of potato salad an hour. Who has the comparative advantage making hot dogs and who has the comparative advantage making potato salad? Frank has the comparative advantage making hot dogs and Earnest has the comparative advantage making potato salad.

Table 3-1

Russia England

Minutes Needed to Make 1

Quantity Produced in 4 Hours

Compass 30 20

Compass Radio 8 16 12 48

Radio 15 5

5) Refer to Table 3-1. a) What is Russia’s opportunity cost of one compass? 2 radios b) What is Russia’s opportunity cost of one radio? ½ compass c) What is England’s opportunity cost of one compass? 4 radios d) What is England’s opportunity cost of one radio? ¼ compass e) Which country has an absolute advantage in producing compasses? England

f)

Which country has an absolute advantage in producing radios? England

g) Which country has a comparative advantage in producing compasses? Russia h) Which country has a comparative advantage in producing radios? England i)

If the two countries decide to trade with each other, which country should specialize in producing compasses? Russia.

j)

If the two countries decide to trade with each other, which country should specialize in producing radios? England.

k) If the two countries specialize and trade with each other, which country will import compasses? England. l)

If the two countries specialize and trade with each other, which country will import radios? Russia.

Figure 3-1 Mary’s Production Possibilities Frontier

Kate’s Production Possibilities Frontier

6) Refer to Figure 3-26. a) What is Mary’s opportunity cost of one muffin? 2 cookies. b) What is Mary’s opportunity cost of one cookie? ½ muffin. c) What is Kate’s opportunity cost of one muffin? 4 cookies. d) What is Kate’s opportunity cost of one cookie? ¼ muffin. e) Who has a comparative advantage in making cookies? Kate. f)

Who has a comparative advantage in making muffins? Mary.

g) If Mary and Kate trade foods with each other, who will trade away muffins in exchange for cookies? Mary will trade away muffins in exchange for cookies.

7) With eight hours of work Elmer can produce 20 pounds of carrots or 15 pounds of peas. With eight hours Bugs can produce 10 pounds of carrots or 7.5 pounds of peas. Can Elmer and Bugs gain from trade? Defend your answer. No, they can’t gain from trade because they both have the same opportunity cost for both goods.

Chapter 4 The Market Forces of Supply and Demand 1) According to the law of demand, when price increases the quantity demanded of a good decreases. 2) Does a change in the price in a market result in a shift of the demand curve or in a movement along the demand curve? Movement along the demand curve. 3) Briefly answer the following. a) If income rises in the market for an inferior good, will the demand curve for the inferior good shift to the right or to the left? To the left. b) If income rises in the market for a normal good, will the demand curve for the normal good shift to the right or to the left? To the right. c) Suppose goods A and B are substitutes. If the price of good A increases, will the demand for good B increase or decrease? Increase. d) Suppose goods A and B are complements. If the price of good A increases, will the demand for good B increase or decrease? Decrease, because if people don’t buy A, they are not going to buy B. e) Suppose consumers expect the price of a good to be higher in the future than it is today. Would the current demand for the good increase or decrease? It would increase. f)

Suppose the number of buyers in a market decreases. As a result, would the demand curve in this market shift to the right or to the left? It would shift to the left, because fewer buyers = less quantity sold.

g) If corn is an input into the production of ethanol, will a decrease in the price of corn increase the supply of ethanol or decrease the supply of ethanol? The supply will increase, because it will be cheaper. h) Suppose researchers discover a new, lower cost method of producing calculators. As a result, will the supply of calculators increase or decrease? The supply will increase, because it is now cheaper to produce a calculator.

Table 4-1 The table below shows the quantities demanded of milk per month by four families at various prices. Price of Gallon of Milk $3.00 $4.00 $5.00 $6.00

The Berman Family 9 8 7 6

The Johnson Family 15 12 9 6

The Harris Family The Patel Family 12 10 8 6

14 10 6 2

4) Refer to Table 4-1. a) If the four families listed are the only demanders in this market and the price of a gallon of milk is $4.00, what is the market quantity demanded? 8 + 12 + 10 + 10 = 40. b) If the four families listed are the only demanders in this market and the price of a gallon of milk increases from $4.00 to $5.00, what is the change in the market quantity demanded? The demand decreases from 40 to 30, which means that the change in the market quantity demanded is = -10.

Figure 4-1

5) Refer to Figure 4-1. a) In this market for iPhones, the technology improves while all other factors remain constant. Which curve(s) shift(s) and in which direction? Supply curve shifts to the right. b) In this market for iPhones, the technology improves while all other factors remain constant. Explain the change(s) in the equilibrium price and quantity. The equilibrium price decreases and the equilibrium quantity increases. c) In this market for tablet computers, more suppliers enter the market and the price of laptops, a substitute good, increases, while all other factors remain constant. Which curve(s) shift(s) and in which

direction? The supply curve shifts to the right (more suppliers) and the demand curve also shifts to the right (price decreases because the price of the substitute good increased). Figure 4-2 Consider the market for 2-packs of light bulbs below.

6) Refer to Figure 4-2. a) What are the values of the equilibrium price and quantity? (200,4) b) At a price of $3, is there a shortage or surplus, and how large is the shortage/surplus? There is a shortage of 100 packs of lightbulbs. c) At a price of $6, is there a shortage or surplus, and how large is the shortage/surplus? There is surplus of 200 packs of lightbulbs.

Table 4-2 The following table shows the supply and demand schedules in a market.

0 2

Quantity Demanded (units) 50 40

Quantity Supplied (units) 0 15

4 6 8 10

30 20 10 0

30 45 60 75

7) Refer to Table 4-2. a) What is the equilibrium price in this market? The equilibrium price in this market is $4. (30,30) b) What is the equilibrium quantity in this market? The equilibrium quantity is 30.

c) At a price of $2, will there be a surplus or shortage of units in this market? Shortage of $25. d) At a price of $8, how large of a surplus will there be in this market? Surplus of $50. e) If the supply curve shifts to the right, will the price in this market rise or fall? The price will fall. Scenario 4-1 Suppose the demand schedule in a market can be represented by the equation , where the quantity demanded and is the price. Also, suppose the supply schedule can be represented by the equation , where is the quantity supplied.

is

8) Refer to Scenario 4-1. a) What is the equilibrium price in this market? (Remember equilibrium occurs when supply equals demand). The equilibrium price is $15. b) What is the equilibrium quantity in this market? The equilibrium quantity is 350 units. c) Suppose the price is currently equal to 10 in this market. Is there a shortage or surplus in this market, and how large is the shortage/surplus? There is a shortage of a 100 units. d) Suppose the price is currently equal to 18 in this market. Is there a shortage or surplus in this market, and how large is the shortage/surplus? There is a surplus of 60 units....