Answers+to+Part+B+on+first+midterm+Fall+2009

Answers+to+Part+B+on+first+midterm+Fall+2009 - Answers to...

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Unformatted text preview: Answers to Part B of the First Exam Fall 2009 NOTE: The answers below correspond to Version A of the exam. The other versions had slight variations in numerical values and other aspects of the question. 1. (20 points) The demand and supply for coin-operated skyhooks are given by the equations: P = 80 – 3 Q P = 20 + 3 Q A. (demand) (supply) Determine the equilibrium price and quantity in this market. Show your work. Solve simultaneously the supply and demand functions: 80 ! 3Q 60 Q P P B. = = = = = 20 + 3Q 6Q 10 20 + 3( ) 10 50 Suppose that an improvement in technology increases supply at all prices by 10 units. What is the effect on equilibrium price and quantity? Solve the supply equation for Q: P = 20 + 3Q P ! 20 = 3Q P ! 20 Q= 3 To obtain the equation for the shifted supply curve, add 10 to this expression: P ! 20 + 10 3 3Q = P ! 20 + 30 3Q = P + 10 Q= P = ! 10 + 3Q [Notice that this expression is NOT the same as would be obtained by adding 10 to the right-hand side of the original supply function. Shifting the supply function UP by $10 at every quantity is not the same as shifting it to the RIGHT by 10 units at every price.] In the other versions of the exam, either the demand curve or the supply curve is shifted to the left or to the right by 10 units. In each version, the key issue is obtaining the correct expression for the shifted function. In each case it is necessary to solve the appropriate equation for Q before adding or subtracting 10. Now solve simultaneously this equation for the shifted supply curve and the original demand curve: 80 ! 3Q 90 Q P P C. = = = = = ! 10 + 3Q 6Q 15 ! 10 + 3( ) 15 35 Does the equilibrium quantity change by 10 units, or by more, or by less? Explain why. The equilibrium quantity increases only by 5, from 10 to 15. The reason is that price has fallen from 50 to 35. Quantity supplied would increase by 10 only if the supply shift caused no price change—that is, if supply were perfectly elastic. (20 points) The production possibility curves for two countries, Orkney and Shetland, are illustrated below. The only productive resource in each country is labor. Orkney has 100 units of labor, while Shetland has 25 units of labor. O rkney Kilts Kilts 2. 100 200 250 H aggi s A. Shetland 150 H aggi s Which country, if any, has a comparative advantage in haggis? Which country, if any, has a comparative advantage in kilts? The negative of the slope of the production possibility curve in each country is the opportunity cost of the good on the horizontal axis measured in terms of units of the good on the vertical axis. Thus: Opportunity costs Orkney Shetland Haggis Kilts 4/5 kilt 5/4 haggis 2/3 kilt 3/2 haggis A country has a comparative advantage in a good if it has the lowest opportunity cost for that good. The lower values in each column are highlighted in red. Thus Shetland has a comparative advantage in haggis, while Orkney has a comparative advantage in kilts. Which country, if any, has an absolute advantage in haggis? Which country, if any, has an absolute advantage in kilts? Shetland, which has 25 units of labor, can produce 150 units of haggis if it produces no kilts. Thus the productivity of a single unit of labor must be 150/25, or 6 units of haggis. Similarly, since Shetland can produce using all its labor 100 kilts, the productivity of a single unit of labor in kilt-making must be 100/25 = 4. Applying the same logic to Orkney and gathering the results, we have the following table of productivities: Orkney Shetland Haggis 2.5 6 Kilts 2 4 The larger values in each column are highlighted in green. Thus Shetland has an absolute advantage in the production of each good. B. If these countries engage in international trade, would you expect that Orkney exports kilts or Haggis? Why? Both countries can gain from trade if they specialize in producing the good in which they have a comparative advantage, exporting it in exchange for the good in which they have have a comparative disadvantage. Thus Orkney exports kilts. ...
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This note was uploaded on 11/10/2011 for the course ECON 220:102 taught by Professor Rubin during the Fall '11 term at Rutgers.

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