Comparative advantage in producing towels

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Reference no: EM13847559

1.  In the market for a particular good, at a price of $26, the quantity demanded is 300 and the quantity supplied is 450.  Which of the following is true?

I. At a price of $26, there is pressure for the price to fall

II. If the price of a substitute for this good decreased, the new equilibrium price would be less than $26

III.  At a price of $28, quantity supplied - quantity demanded ≥ 150

a)  Only I is true

b)  Only II and III are true

c)  Only I and III are true

d)  Only I and II are true

e)  All of them are true

2.  The market for a good starts out with an equilibrium price of $15 and an equilibrium quantity of 300.  There is a change in the market which results in a new equilibrium at a price of $10 and a quantity of 400.  Which of the following could have causes such a change?

I.    A decrease in the cost of an input in the production of this product

II.   A decrease in the price of a complement to this good

III.  A decrease in the price of a substitute for this good

a)  None of them could cause the change

b)  Only I could cause the change

c)  Only II could cause the change

d)  Only III could cause the change

e)  Both I and II could cause the change

Questions #3 and #4 both refer to the following data: 

Rick can produce 18 towels and 0 soap, 0 towels and 9 soaps, or any linear combination in between.  Charlie can produce 15 towels and 0 soap or 0 towels and 3 soaps, or any linear combination in between.  Any graph of a PPF for a person or the economy has towels on the horizontal axis.

3.  Which of the following statements are true?

I.    Charlie has the comparative advantage in producing towels

II.   Rick cannot benefit from trading with Charlie because he can produce more of both goods

III.  A trade of 1 soap for 6 towels could make both Rick and Charlie better off.

a)  Only I is true

b)  Only I and III are true

c)  Only II is true

d)  Only III is true

e)  None of them are true.

4.  At the point on the PPF for the economy with 19 towels and 7 soaps (19,7), the MRT is

a)  -5

b)  -2

c)  -1/2

d)  -1/5

e)  question won't work since this point is not on the economy's PPF.

5.  Refer to the figure below.  The economy is currently operating at point B. You correctly deduce that the economy

1290_Consumer Goods-Capital Goods.jpg

a) is producing inefficiently if it only cares about consumer goods

b) would have a higher opportunity cost of consumer goods if it produced fewer consumer goods

c) recently experienced some type of technological breakthrough.
d) overcome the scarcity problem.

e)  reached a point where it can produce more consumer goods and more capital goods.

6.  Which of the following must be true about a market with standard shaped supply and demand curves where the demand for the good has increased?

            I.   There will be a shortage of the good at the original             equilibrium price

            II.  The consumers of this good have more income

            III. The new equilibrium price is higher

a)  Only III must be true

b)  Only I and III must be true

c)  All 3 must be true

d)  Only II and III must be true

e)  None of them are true

7.  Which of the following cannot cause a shift in the demand for red sweaters?

a)  An increase in violent attacks on people wearing red clothing

b)  A decrease in the price of red sweaters

c)  Global warming

d)  A decrease in the price of ski vacations

e)  An increase in income for people in Vermont and Minnesota

8.  Consider the following facts about a graph where orange production is measured on the x axis and apple production is measured on the y axis:  Point A produces 50 oranges and 20 apples.  Point B produces 60 oranges and 40 apples.  The economy is capable of producing at point A and point B.  Which of the following statements must be true about this graph?

I.    Point B is on the ppf

II.   Point A is inside the ppf

III.  The opportunity cost of 10 oranges in moving from A to B is 20 apples.

a) Only I is true

b) Only II is true

c)  Only II and III are true

d) Only I and II are true

e)  All of them are true

SECTION II

DO ONLY 1 OF THESE 2 QUESTIONS

1.    Answer the following questions based on the production possibilities below:

                                 CORN               WHEAT

                                    100                      0

                                     80                       25

                                     60                       45

                                     40                       60

                                     20                       70

                                      0                        75

a)  Find the opportunity cost of one more unit of CORN when society is currently producing 40 units of CORN and when it is producing 80 units of CORN?

b)  What happens to the opportunity cost of additional units of CORN when addition amounts of CORN are produced?  Does this make sense?  Why?  Explain what affect this has on the shape of the PPF.

c)  Assume that a PPF for this economy has WHEAT on the horizontal axis.  Find the MRT of the PPF between 45 and 60 units of WHEAT.  Explain how this number is consistent with part of your answer to (a).

d) Can we say anything about whether or not 40 units of CORN and 60 units of WHEAT is an efficient place to produce?  If so, why, if not, what else would we need to know?  How about 50 units of CORN and 40 units of WHEAT?

2.  Mr. Kinsella and Mr. McDonald have their own home gardens.  Based on the amount of time and land each has available, the following tables represent the maximum production of tomatoes and peppers each is capable of:

                        Mr. Kinsella                                                   Mr. McDonald

Tom.   Pep.                Tom.   Pep.                            Tom.   Pep.                Tom.   Pep.

  0          12                    3          3                                  0          40                    3        16

  1           9                     4          0                                  1          32                    4          8

  2           6                                                                     2          24                    5          0

a)  Find the opportunity cost of producing tomatoes for each person.  Use this information to help explain why Mr. McDonald might not produce tomatoes even though he can produce more than Mr. Kinsella.

b) Draw the PPF for this economy if these two people are working together and specializing.  Put tomatoes on the horizontal axis.  Specifically label the intercepts and any point(s) where the slope of the PPF changes

c)  Suppose Mr. McDonald proposes that he will give Mr. Kinsella 2 units of peppers in exchange for 1 unit of tomatoes.  Explain why Mr. McDonald would propose such a trade, but Mr. Kinsella will not accept it.

d)  Explain why it is possible for Mr. Kinsella to consume 2 unit of tomatoes and 14 units of peppers and Mr. McDonald to consume 2 units of tomatoes and 26 peppers even though it is above each person's PPF. What is the "price" of one unit of tomatoes in this case?

SECTION III

DO ONLY 1 OF THESE 2 QUESTIONS

1.  A new synthetic compound has been developed by scientists that can be used instead of leather in briefcases, furniture, etc.  This compound cannot be used in clothing or shoes since body head melts the compound.

a)  Draw a supply and demand diagram and explain how this change affects the market for leather.  Be sure to specifically state how equilibrium price and quantity change.

b)  How will the changes in (a) affect the market for shoes?  Draw a supply and demand diagram and be explicit about how price and quantity change.

c)  Given your answer to (b), draw a supply and demand diagram showing the effect on the shoelace market (note:  Shoelaces are not made of leather or this new compound). Explain why and how you changed the market, and be explicit about how price and quantity change.

d)  If we found out that the inventor of this compound bought more potatoes after he patented this process than before, explain whether this indicates potatoes are more likely to be a normal or inferior good for this person.

2.  Below are the demands for two consumers and the supplies for two firms for a particular good:

Firm  #1                      Firm  #2                      Cons.  #1                   Cons.  #2

P         Q                     P         Q                     P         Q                     P         Q

$30     16                    $30     6                      $30     12                    $30     2

$25     13                    $25     4                      $25     14                    $25     3

$20     10                    $20     2                      $20     16                    $20     4

$15     7                     $15     0                      $15     18                    $15     5

$10     4                     $10     0                      $10     20                    $10     6

$5        1                     $5        0                      $5        22                    $5        7

a)  Explain why the supply for firm #2 does not violate the law of supply.

b) Find the equilibrium price and quantity if these are the only consumers and firms in the market.

c) The price of lemons doubles.  Lemons are not used in the production of the good in this problem.  The change in the price of lemons causes the equilibrium price of this good to become $20.  Are lemons a complement or substitute for this good?  Explain how you know that and find the equilibrium quantity demanded at the new equilibrium price.

 d)  Before the change in the price of lemons, it turns out the equilibrium price in this market was $15, not your answer to (b).  Does that mean there are more firms or more consumers than what is given?  Find the quantity demanded (or supplied) for the missing consumer (or firm) at a price of $15.

Reference no: EM13847559

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