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exrtra_exercises_B_2007

# exrtra_exercises_B_2007 - Universidad Carlos III de Madrid...

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Universidad Carlos III de Madrid, Academic Year 2007-08, First Semester MICROECONOMICS I Exercises (B) 1. [Harvard exercise by G. Mankiw] Consider the US market for brie cheese, a snacking favorite of the “thir- tysomething” crowd. Demand is given by the equation Q d = 1 , 000 - 20 P , and supply is given by the equation Q US s = 40 P - 200. The French, who have a much longer history of making brie than their Amer- ican counterparts, can supply it according to the following equation: Q France s = 60 P + 200. However, the French don’t eat brie at all. (a) Without any cheese trade between the two countries, what does the US market for brie look like, graphically? What are the equilibrium price and quantity in the US? (b) Assume that cheese trade opens between the US and France. Draw the resulting equilibrium. What are the price and quantity? In equilibrium, how much will US cheesemakers supply? How much will French cheesemakers supply? (c) Show, on a diagram, US consumer surplus, US producer surplus, and US total surplus with no trade and with free trade. 2. Frank works for an important firm and receives a high wage for his services. Recently, after the end of a meeting, he decided to walk back to his office, instead of taking a cab. The walk took him 70 minutes, while the cab ride would have taken 10 minutes and costed 20 euros. His boss harshly complains about Frank’s decision, telling him that it was not cost-effective. Frank replies that his decision made the firm

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exrtra_exercises_B_2007 - Universidad Carlos III de Madrid...

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