pset1 - Principles of Microeconomics Problem Set One 1...

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1 Principles of Microeconomics Problem Set One 1 . Comparative Advantage and Trade The following table gives the production opportunities of the United State and Japan for producing cars and grain. Cars per Year (millions) Tons of Grain per Year (millions) United States 400 1,000 Japan 800 500 1a. Graph the production possibilities frontier for the U.S. and Japanese economies. 1b. For the U.S. what is the opportunity cost of a car? Of grain? For Japan what is the opportunity cost of a car? Of grain? 1c. Which country has an absolute advantage in producing cars? Which has an absolute advantage in producing grain? 1d. Which country has a comparative advantage in producing cars? In producing grain? 1e. Without trade, each country spends half its time producing cars and half producing grain. What quantities of cars and grain does each country produce? 1f. Starting from a position without trade, give an example of how trade could make both countries better off. 2. Supply and Demand Analysis Using a standard market equilibrium supply-demand diagram, show how each of the following events would affect equilibrium price and quantity in the indicated market. Label your diagram carefully: be clear as to which curve is shifting and why, and what happens to equilibrium price and quantity. 2a. The market for orange juice: A hurricane in Florida that destroys a substantial portion of the orange crop.
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