eco100 term test1 with answer
ECO
100
–
James
E.
Pesando
Term Test 1 – October 18, 2013
Answer key 1. Russia can produce 50 cars per week or 200 computers per week. Japan can produce 75 cars per week or 300 computers per week. (14 marks)
(a) Calculate the opportunity costs of cars and computers for each country?
Cars
Russia
Japan
Computers
4 computers
4 computers
¼ cars
¼ cars
(b) What trade ratio(s) will allow Japan and Russia to both gain from trade?
Answer: The trade ratio must lie between the opportunity costs of both countries in order for them to gain from trade. Since the opportunity costs are the same, there is no trade ratio that will allow both countries to gain from trade.
(c) Suppose there is a national disaster and Japan’s productivity falls to 25 cars per week or 300 computers per week. If trade takes place, which good will
Japan export now? Why?
Answer: Japan’s opportunity costs are now 12 computers per car, or 1/12 car per computer. Japan now has a comparative advantage in the production of computers
(rel. low opp cost) and so they will export computers. Russia will export cars.
2.
The demand for hot chocolate is as follows. The Supply is perfectly inelastic at quantity of 40. (16 marks)
Price
$0
$1
$2
$3
$4
$5
Quantity Demanded
100
80
60
40
20
0
Quantity Supplied
40
40
40
40
40
40
(a) Draw the DD0 and SS0 curves in a fully labeled diagram. What is the equilibrium price? Explain.
Answer: $3 b/c Qd = Qs. If it were any other price, the market will force it to change. (b) Clearly identify the consumer surplus and producer surplus on the above diagram. Answer: on diagram
(c) Marshmallows are often consumed together with Hot Chocolate. The price of Marshmallows decreases. On the above diagram, Draw and clearly label the new DD1 and/or new SS1 curves. How does the
Term Test 1 – October 18, 2013
Answer key 1. Russia can produce 50 cars per week or 200 computers per week. Japan can produce 75 cars per week or 300 computers per week. (14 marks)
(a) Calculate the opportunity costs of cars and computers for each country?
Cars
Russia
Japan
Computers
4 computers
4 computers
¼ cars
¼ cars
(b) What trade ratio(s) will allow Japan and Russia to both gain from trade?
Answer: The trade ratio must lie between the opportunity costs of both countries in order for them to gain from trade. Since the opportunity costs are the same, there is no trade ratio that will allow both countries to gain from trade.
(c) Suppose there is a national disaster and Japan’s productivity falls to 25 cars per week or 300 computers per week. If trade takes place, which good will
Japan export now? Why?
Answer: Japan’s opportunity costs are now 12 computers per car, or 1/12 car per computer. Japan now has a comparative advantage in the production of computers
(rel. low opp cost) and so they will export computers. Russia will export cars.
2.
The demand for hot chocolate is as follows. The Supply is perfectly inelastic at quantity of 40. (16 marks)
Price
$0
$1
$2
$3
$4
$5
Quantity Demanded
100
80
60
40
20
0
Quantity Supplied
40
40
40
40
40
40
(a) Draw the DD0 and SS0 curves in a fully labeled diagram. What is the equilibrium price? Explain.
Answer: $3 b/c Qd = Qs. If it were any other price, the market will force it to change. (b) Clearly identify the consumer surplus and producer surplus on the above diagram. Answer: on diagram
(c) Marshmallows are often consumed together with Hot Chocolate. The price of Marshmallows decreases. On the above diagram, Draw and clearly label the new DD1 and/or new SS1 curves. How does the