American productivity so that a Chinese worker can produce 100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance in Chinese productivity affect the economic well-being of the citizens of the two countries?
8. An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes. a. Who has the absolute advantage in coffee? Explain.
b. Who has the comparative advantage in coffee? Explain.
c. If the two countries specialize and trade with each other, who will import coffee? Explain.
d. Assume that the two countries trade and that the country importing coffee trades 2 ounces of soybeans for 1 ounce of coffee. Explain why both countries will benefit from this trade. 9. Are the following statements true or false? Explain in each case.
a. ―Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.‖ b. ―Certain very talented people have a comparative advantage in everything they do.‖
c. ―If a certain trade is good for one person, it can‘t be good for the other one.‖
d. ―If a certain trade is good for one person, it is always good for the other one.‖
e. ―If trade is good for a country, it must be good for everyone in the country.‖
10. The United States exports corn and aircraft to the rest of the world, and it imports oil and clothing from the rest of the world. Do you think this pattern of trade is consistent with the principle of comparative advantage? Why or why not? 11. Bill and Hillary produce food and clothing. In an hour, Bill can produce 1 unit of food or 1 unit of clothing, while Hillary can produce 2 units
of food or 3 units of clothing. They each work 10 hours a day.
a. Who has an absolute advantage in producing food? Who has an absolute advantage in producing clothing? Explain.
b. Who has a comparative advantage in producing food? Who has a comparative advantage in producing clothing? Explain.
c. Draw the production possibilities frontier for the household (that is, Bill and Hillary together) assuming that each spends the same number of hours each day as the other producing food and clothing.
d. Hillary suggests, instead, that she specialize in making clothing. That is, she will do all the clothing production for the family; however, if all her time is devoted to clothing and they still want more, then Bill can help with clothing production. What does the household production possibilities frontier look like now?
e. Bill suggests that Hillary specialize in producing food. That is, Hillary will do all the food production for the family; however, if all her time is devoted to food and they still want more, then Bill can help with food production. What does the household production possibilities frontier look like under Bill‘s proposal? f. Comparing your answers to parts c, d, and e, which allocation of time makes the most sense? Relate your answer to the theory of comparative advantage.
1. Explain each of the following statements using supply-and-demand diagrams.
a. ―When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.‖
b. ―When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets.‖ c. ―When a war breaks out in the Middle East, the price of gasoline rises, and the price of a used Cadillac falls.‖
2. ―An increase in the demand for notebooks raises
the quantity of notebooks demanded but not the quantity supplied.‖ Is this statement true or false? Explain.
3. Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.
a. People decide to have more children. b. A strike by steelworkers raises steel prices. c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises. e. A stock-market crash lowers people‘s wealth. 4. Consider the markets for DVDs, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
? DVDs and TV screens ? DVDs and movie tickets ? TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.
c. Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets. 5. Over the past 30 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market for computers? For computer software? For typewriters?
6. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls. c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented. 7. A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed:
? Reduced police efforts have increased the
availability of drugs on the street.
? Cutbacks in education efforts have
decreased awareness of the dangers of drug addiction.
a Use supply-and-demand diagrams to show how each of these hypotheses could lead to an increase in quantity of drugs consumed. b How could information on what has happened to the price of drugs help us to distinguish between these explanations?
8. Suppose that in the year 2015 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2020 and 2030? (Hint: 5-year-olds need babysitters, whereas 15-year-olds can be babysitters.)
9. Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice? 10. The market for pizza has the following demand and supply schedules:
Price Quantity Demanded Quantity Supplied
$4 135 pizzas 26 pizzas 5 104 53 6 81 81 7 68 98 8 53 110 9 39 121
a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market?
b. If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium?
c. If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium?
11. Consider the following events: Scientists reveal that consumption of oranges decreases the risk
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