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Modal Exam #1

# Modal Exam #1 - FIRST EXAMINATION ECON 200 FALL 2009 1(12...

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FIRST EXAMINATION ECON 200 FALL, 2009 1. (12 points) Suppose Country A has 40 workers and each worker can produce either 3 units of food or 1 unit of clothing. Country B has 10 workers and each worker can produce either 6 units of food or 6 units of clothing. (a) Draw in separate diagrams the production possibilities frontier for each country. Place clothing on the horizontal axis and food on the vertical axis. Be sure to label the intercepts and the slope on your diagrams. (b) Which country has absolute advantage in the production of clothing? Defend your answer in 1-2 sentences. (c) Which country has comparative advantage in the production of clothing? Defend your answer in 1-2 sentences. (d) Suppose that in the absence of trade, Country A produces and consumes 60 units of food and 20 units of clothing, while Country B produces and consumes 30 units of food and 30 units of clothing. Someone proposes the following agreement: “Country A will produce only food and no clothing. Country B will produce only clothing and no food. Country A will give 30 units of food to Country B in exchange for 20 units of clothing.” Will Country A accept the agreement? Will Country B accept the agreement? Defend your answer in 2- 3 sentences. 2. (10 points) Draw separate demand and supply diagrams for parts (a) and (b) of this question. Assume throughout this question that the laws of supply and demand hold in the red wine market. In January, the equilibrium price of red wine is P 0 and the equilibrium quantity of red wine is Q 0 (a) In February, a new study shows that drinking red wine lowers the probability of having a heart attack. In February, the equilibrium price of red wine is P 1 and the equilibrium quantity of red wine is Q 1 .

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(i) Will the new equilibrium price P 1 be greater than, less than, or equal to P 0 ? Defend your answer in 1-2 sentences. (ii) Will the new equilibrium quantity Q 1 be greater than, less than, or equal to Q 0 ? Defend your answer in 1-2 sentences. (b) In March, a late frost destroys part of the red grape crop. As a result, the price of red grapes (which are used to produce red wine) rises. Consumers remain convinced that drinking red wine reduces the chances of a heart attack. In March, the equilibrium price of red wine is P 2 and the equilibrium quantity of red wine is Q 2 . (i) Can you be certain that the new equilibrium price P 2 will be greater than P 0 ? Defend your answer in 1-2 sentences. (ii) Can you be certain that the new equilibrium quantity Q
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Modal Exam #1 - FIRST EXAMINATION ECON 200 FALL 2009 1(12...

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