1. Comparative Advantage
The following chart represents the production capabilities of the US and Japan:.
|
|
Output per worker- day
|
|
|
Country
|
Food
|
Clothing
|
|
US
|
2
|
1
|
|
Japan
|
3
|
9
|
a) Which country has an absolute advantage in food production? In clothing? Why?
b) What is the US opportunity cost of producing food? Of clothing? Why?
c) What is Japan's opportunity cost of producing food? Of clothing? Why?
d) Which country has a comparative advantage in producing food? Why?
e) Which country has a comparative advantage in producing clothing? Why?
f) Assume the US has 200 million workers; what are the maximum amounts of clothing and food it can produce and consume? Explain.
g) Assume Japan has 50 million workers; what are the maximum amounts of clothing and food it can produce and consume? Explain.
h) If both countries specialize and trade, what is the maximum amount of food and clothing each can consume? Assume a trade ratio of 1:1. Explain.
2. Utility-Maximization
Consider a rational, utility-maximizing consumer who is choosing between two goods: clothing
(C) and food (F). The utilities of the two goods are independent, so total utility (U) = Uc+Uf. The following chart shows the utility from each good:
|
Quantity consumed of Food (F)
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Utility from F
|
0
|
12
|
20
|
24
|
26
|
27
|
|
Quantity of clothing (C)
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Total Utility from C
|
0
|
40
|
70
|
90
|
100
|
100
|
The price of clothing is $5 per unit and the price of food is $1 per unit.
Explain how this consumer would allocate an income of $18 on the two goods.
3. Supply and Demand
Consider the market for silver, where quantity is in ounces, and price in dollars.
|
Price (P)
|
$2 7
|
$2 4
|
$2 1
|
$1 8
|
$1 5
|
$1 2
|
$ 6
|
$ 3
|
$ 0
|
|
Quantity Demanded (QD)
|
0
|
2
|
4
|
6
|
8
|
10
|
1
2
|
1
4
|
1
6
|
|
Quantity Supplied (QS)
|
16
|
14
|
12
|
10
|
8
|
6
|
4
|
2
|
0
|
a) What are the equilibrium price and quantity? Why?
b) Assume that the Government puts in place a price ceiling (maximum) of $6 per ounce. What will be the new Qs, the new Qd, the actual amount bought/sold, and the shortage/ surplus (if any)? Why?
c) Assume that the government imposes a price floor (minimum) of $ 21 per ounce in this market. What will be the new Qs, the new Qd, the actual amount bought/sold, and the shortage/surplus (if any)? Why?
d) Calculate the total revenue received by the seller from actual trade (defined as actual price multiplied by actual quantity) in this market in the original equilibrium, and under the price controls described in parts b and c above. Explain.