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spent during the skiing trip. For example, study time during the reading week, going to a concert during the reading week, or whatever the next best alternative use of the reading week time is. A1-2 False Positive statement is a statement about what actually is (was or will be) opposed to what ought to be. The sentence gave in the question stated that “the government must increase its spending...”, which is talking about the government ought to increase its spending based on value judgement. Therefore, this sentence is an example of normative statement. A positive statement of this sentence should be:”during a recession the government increases its spending to replace reduced private spending and reduce unemployment even this leads to an increase in the national debt” A1-3 True Endogenous variable is a variable that is explained within a theory, which in this case is the price and quantity of corn. Exogenous variable is a variable that is determined outside the theory. It might affect the endogenous variable, but we can safely assume that the exogenous variable is not influenced by the endogenous variable. In this case, the price and quantity of corn are affected by the government ethanol mandates, the local weather during the growing season and the extent of wild fired affecting Russian wheat production and therefore would-wide wheat prices, which are exogenous variable in this case. However, we can safely assume that these exogenous variables mentioned above are not influenced by the price and quantity of corn. A1-4 False Even Japan has an absolute advantage in both cell phone and computer production; there can be mutually beneficial trade between Japan and Finland. The Gains from international trade do NOT depend on the pattern of absolute advantage. It is the comparative advantage that leads to the gain of trade.
In this case, the opportunity cost:
Cell phone Computer Japan 1/3 computer 3 cell phones Finland 1/4 computer 4 cell phones Therefore, Finland has a comparative advantage on cell phone production compare to Japan.
A 1-8 False If there is an increase in the demand ( a rightward shift in the demand curve). potential trading parties that have different in opportunity costs. If the shift in the demand curve is greater than the shift of the supply curve. This is due to there being a decreased demand for such items. more is exchanged at a higher price. Cell phone Japan -3 Finland +4 “World” +1 The Gain of 1 cell phone can be shared (mutually beneficial). Computer +1 -1 0 . If the opposite occurs. because the seller holding the stock wishes to sell more at a higher price. or nation is able to concentrate on producing goods and services that it produces efficiently while trading to obtain good and services that it does not produce efficiently. However. the quantity is going to decrease.Gains from trade can be shown if we consider Japan moving 3 unit of resource from cell phone to computer production and Finland moving 1 unit of resources from Computer to cell phone production. there is a decrease in demand. each individual. the increase of consumer income leads to a decrease in the pricing of inferior goods. then the quantity is going to increase. So. A 1-7 True The stock prices are falling. Therefore. This leads to an excess demand which leads to an increase in pricing. therefore. The intuitive reasoning behind this is an increase in demand creates a shortage at the initial equilibrium price and the unsatisfied buyer bid up the price. Inferior goods will decrease their prices to compete with higher quality products. With trade. they can afford to buy higher quality items. Everyone has a comparative advantage in something. then there is going to be an increase in the supply which causes a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged. Also. This causes a decrease in both the equilibrium price and the equilibrium quantity exchanged. region. everyone must be self-sufficient. This rise in price causes a larger quantity to be supplied with the result that at the new equilibrium. A1-6 False Some of the prices of the grocery store items will increase because of increased demand. can each benefit from trade by obtaining a good at a cost below their own opportunity cost. A1-5 True Without trade. we cannot predict whether more or less of the stock will be traded. As consumer income increases. then there will be an increase in both the equilibrium price and the equilibrium quantity exchanged.
A1-9 the table below lists points on a production possibility frontier or PPF (sometimes called the production possibility boundary or PPB). Good x Good y a) 0 55 1 54 2 52 3 49 4 45 5 40 6 34 7 27 8 19 9 10 10 0 b) Opportunity cost of the nth unit of x in terms of unit of y 1 55 – 54 1 2 54 – 52 2 3 52 – 49 3 4 49 − 45 4 5 45 − 40 5 6 40 – 34 6 7 34 – 27 7 8 27 – 19 8 9 19 – 10 9 10 10 .0 10 The opportunity cost of x increases as more of it is produce is because the each factor of production is not equally useful in producing both x and y. n= .
as we produce more and more x. the relative price of x given this production point is 3. Therefore. the amount of y that must be forgone to produce one extra unit of x rises. . Therefore. Therefore. we must shift more resources that are quite suitable for making y and maybe less suitable for making x. d) The relative price per unit of x is given by. Plug in the number. is very useful for making x. Then. the opportunity cost of x given this production point is 5 units of y. c) The opportunity cost per unit of x is given by. but a substantial increase in x. Some resources that may not be very useful for making y. the opportunity cost of producing x rises as more x is produced. as we produce more x. This shift of resources will therefore lead to a small reduction in y. Plug in the number.86 units of y. However.Let’s start from the point when production of x is zero. and gradually shift more resources toward the production of x.
. Yes. the economy will be able to provide units of x and y that was previously unattainable as shown in the graph.e) With trade. the consumption possibility curve can lie beyond the production possibility curve. The point at which it should be produced should shift towards the left on the table given. f) We do not expect the economy to remain at the production point in part d. By being opened to trade. the economy will be better able to provide x and y to its members by being opened to trade.
For example. This combination is unattainable without trade. a point outside of the PPF-without-trade will be possible. if we choose to produce 0 x and 55 y as shown in the PPF. a combination of 7 x and (55-21 = 34) y will be achieved. if we choose to trade 21 y of our production of 7 x with the rest of the world. .For example.
QD = 0 100-10P=0 P=10 If consumption falls to 0. Qs’ = -60+30P 0 = -60+30P P=2 . we find that the equilibrium quantity is 50.00 By setting P=0. then the price would be $2. subbing in P=5 into the equation for QS. then the price would be $10.50 to $2. the maximum amount that would ever be consumed would be 100.5 If production falls to 0.00 To find the equilibrium quantity.00. c) The price at which there will be no production has changed from $2.50. -50+20P = 100-10P 20P+10P = 50+100 30P = 150 P=5 The equilibrium price is $5.A1-10 a) QS =0 -50+20P=0 20P=50 P=2. b) To find the equilibrium price.
5. At P = 2. An increase in supply creates a surplus at the initial equilibrium price. and the unsuccessful supplier force the price down. e) QS’ = QD -60+30P = 100-10P 40P = 40 P=1 The consumer is better off because the equilibrium prices decreased from $5.00. The old producer is worse off because a increase in the supply causes a decrease in the equilibrium price which means that they’re selling their product at a lower price and therefore are losing money. This drop in price increases the quantity demanded and the new equilibrium is at a lower price and a higher quantity exchanged. After joining the market.00 to $1. . there is now excess supply. The new producer is better off because before they joined the market.d) The price we calculated is no longer the equilibrium price because an increase in supply puts a downward pressure on the price and causes a decrease in the equilibrium price. they were not making any profit at all. they made some profit which is better off than not making any money at all before they were in the market.
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