Questions
1. Canada's inverse demand function for cheese is P=100-2Q and its inverse supply function is: P=Q. Mexico's inverse demand function for cheese is P=50-1/2Q and its inverse supply function is: P=1/2Q.
A. If Canada is autarkic, what is the equilibrium price and quantity of cheese?
B. If Mexico is autarkic, what is the equilibrium price and quantity of cheese?
C. If the two nations trade, which will import cheese? Which will export?
D. Determine the residual supply function for the exporting nation.
E. Determine the residual demand function for the importing nation.
F. Use the residual demand and supply functions to determine the world price for cheese.
G. Use the residual demand and supply functions to determine the quantity of cheese traded between the two nations.
2. The production possibilities frontier (PPF) for Canada is: B=100-2C
Where:
B = quantity of beer produced
C = quantity of cigarettes produced
A. Draw Canada's PPF. Put beer on the vertical axis and cigarettes on the horizontal axis.
B. What is Canada's opportunity cost of beer?
C. What is Canada's opportunity cost of cigarettes?
D. Draw Mexico's PPF: B=50-1/2(C)
E. What is Mexico's opportunity cost of beer?
F. What is Mexico's opportunity cost of cigarettes?
G. Which nation has the comparative advantage in beer? In cigarettes?
H. Assume each nation is autarkic and producing and consuming that amount of beer and cigarettes that is at the midpoint of the PPF. Identify this point, and the respective quantities, on each nation's PPF. Label this point "Point A."
I. Assume each nation specializes 100% in the product in which it has the comparative advantage. Label this point "Point B."
J. Assume the nations trade with each other. Identify one possible mutually acceptable price at which beer and cigarettes trade for one another. Make sure you write "one mutually acceptable price of 1 beer is # cigarettes" which implies the price of "1 cigarette is # beer."
K. Using the prices you established in part J, propose one possible trade of beer and cigarettes at that price. Show how that will move each nation to a point outside its PPF. Label that point "Point C."
3. Nation 1 can produce Y tons of product A per worker per day and Z tons of product B per worker per day. Nation 2 can produce G tons of A per worker per day and H tons of product B per worker per day (Y, Z, G, H are numbers of your choice).
A. Which nation has an absolute advantage in A? In B?
B. In the Nation 1, what is the opportunity cost of A (in terms of B)? What is the opportunity cost of B?
C. In Nation 2, what is the opportunity cost of A (in terms of B)? What is the opportunity cost of B?
D. Which nation has a comparative advantage in A? Why? In B? Why?
E. If the nations choose to trade, what is one potentially mutually agreeable price for A? For B?
4. Germany has the following demand for garden gnomes: P = 200 - Q and the following domestic supply of garden gnomes: P = 50 + Q.
A. Assume Germany is autarkic, graph the demand and supply functions and determine the equilibrium price and quantity.
B. Determine the amount of consumer surplus, producer surplus, and gains to trade.
C. Assume Germany can import similar garden gnomes from Poland at a free-trade price of $50. What is domestic quantity supplied? Domestic quantity demanded? The amount of imports? (Assume Germany is a "small" nation).
D. Germany applies a $50/gnome tariff on Polish made gnomes. What is domestic quantity supplied? Domestic quantity demanded? The amount of imports?
E. Calculate the loss of consumer surplus as a result of the tariff.
5. When a tariff is applied to a foreign product consumed by a "small" nation, the tariff results in a loss of consumer surplus that can be broken out into four separate areas (a, b, c, and d).
A. Describe in detail what each of the four areas represents.
B. Identify which areas are transfers and which represent deadweight losses.
6. What are quota rents? List all of the potential recipients of these rents. Who is most likely to get these rents?
7. From the Roberts book:
A. What is the difference between the roundabout way to wealth and comparative advantage?
B. What is the "real cost of making televisions" in America?
C. What happened to the 4,000 employees of the Star tv factory?
D. Over the period 1960-2004, how could manufacturing output increase when the number of workers employed in manufacturing fell?
E. What economic concept is Dave trying to explain to Ed on page 45 when he talks about Japanese tvs and dollars?
F. On page 46, Dave talks about two kinds of losses from tariffs. To which two areas on the tariff graph do these losses represent?
G. On page 62, what kind of tariff is Dave talking about?
8. During the time of Abraham Lincoln's presidency the trans-continental railroad was nearing completion. When he was advised to buy iron rails from Britain to finish the job, Lincoln said: "It seems to me that if we buy the rails from England, then we've got the rails and they've [Britain] got the money. But if we build the rails here, we've got our rails and we've got our money." What is the flaw in Lincoln's logic?
9. Why might paying U.S. sugar beet and sugar cane farmers not to produce sugar make the United States, as a whole, better off?
10. In what ways do trade barriers harm downstream domestic industries?