101_PS_9_ans_03 - Answers to Problem Set 9 Questions for...

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Answers to Problem Set 9 Questions for Review 1. The outward bow shape of the production possibilities curve is a consequence of the principle of increasing opportunity cost. 2. A country’s consumption possibilities curve is the set of all combinations of goods that the citizens of that county are able to consume. In a closed economy it coincides with the production possibilities curve. In an open economy it will generally include bundles that lie beyond the PPC. 3. Once country can benefit by trading with another if the opportunity costs of producing different goods are different in the two countries. This condition is often met even one country is absolutely more productive with respect to every good. So false. 4. The tariff of T per automobile causes price to go up by T, because foreign producers can no longer cover their costs at a price of Pw. The higher price leads domestic carmakers to increase production from A 1 to A 2 . The total number of units sold falls from A 4 to A 3 , because of the higher price. The number of units imported falls from A 4 – A 1 to A 3 – A 2 . With no tariff, consumer surplus = a+b+d+e+f and producer surplus is c. With the tariff, consumer surplus falls to a, and producer surplus rises to c+b. So consumers lose from the tariff while domestic car producers gain. With the tariff, the government collects e in tax revenue. Domestic demand Domestic supply World price A 1 A 2 A 4 Automobiles/year Price of Automobiles E World price + tariff A 3 tariff P w P w +T a b c d e f 5. With a quota equal to the number of cars imported under the tariff in the preceding question, the effects are virtually identical to those of the tariff. The changes in consumer and producer surplus are the same as before. The only difference is that the revenue collected by the government under the tariff now goes to the holders of car import licenses as an economic rent.
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Domestic demand Domestic supply World price A 1 A 2 A 4 Automobiles/year Price of Automobiles + quota A 3 P w a b c d e f Domestic supply P w +T Answers to Problems A B C 2,000 2,400 1,000 2,400 Refrigerators/yr Televisions sets/yr 2,000 D 1,000 E F 3,200 L G M 1,600 1,600 3,200 1. The maximum number of television sets this country can produce each year is 2,400. The maximum number of refrigerators is also 2,400. 2. The absolute value of the slope of the consumption possibilities line is the price of television sets divided by the price of refrigerators, which is 1.0. A shown in the diagram, a line with this slope is tangent to the PPC at point G. The annual sale of 1,600 televisions and 1,600 refrigerators at $500 each yields revenue of $1,600,000/yr. Thus the country could consume a maximum of ($1,600,000/yr)/($500/set) = 3,200 television sets per year. Similarly, it could consume a maximum of 3,200 refrigerators per year.
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