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ANSWERS TO TERM TEST #1 (October 28, 2005): 1. (a) P = 10 Q = 4,000 (b) Q demanded = 8,000 Q supplied = 2,000 There is a shortage of eggs. (c) P=12 on the “black market,” since Q demanded = 2,000 if P=12 2. (a) market price increases, but by less than \$5; the price received by sellers falls, but by less than \$5; the price paid by buyers is the market price; the quantity bought and sold decreases (see Figure 6.7, page 129 in text) (b) market price increases by \$5; the quantity bought and sold is unchanged; tax revenue is \$50,000 per month 3. (a) The opportunity cost of producing one car is: 1.67 bushels of wheat in Canada; 0.75 bushels of wheat in Argentina. Argentina has the lower opportunity cost and hence the comparative advantage in the production of cars. Canada would export wheat, if trade occurs. (b) Canada would prefer to produce cars domestically (at an opportunity cost of 1.67 bushels of wheat) rather than trade two bushels of wheat for one car. Argentina would wish to trade since the opportunity cost of producing one car is only 0.75 bushels of wheat.

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