1) Opportunity cost of Germany 300 wheat/ 900 corn= .

33 per unit of corn in terms of wheat Opportunity cost of England 200 wheat/400 corn = .5 per unit of corn in terms of wheat. Therefore, Germany has a lower opportunity cost than England when it comes to producing corn. To find out the opportunity cost of each country to produce wheat in terms of corn. Opportunity cost of Germany 900 corn/ 300 wheat = 3 per unit of wheat in terms of corn Opportunity cost of England 400 corn/ 200 wheat =2 units of wheat in terms of corn Therefore, England has a lower opportunity cost thatn Germany when it comes to producing wheat. If both countries used half their resources then; England would produce : 100 wheat/ 200 corn Germany would produce: 150 wheat/ 450 corn. Since the countries are required to produce 250 wheat and England has a lower opportunity cost when it comes to producing wheat then : England will produce 200 units of wheat, using up all its resources and therefore will not be able to produce anything else Germany will produce the remaining 50 units of wheat required and use its remaining resources to produce 750 units of corn, since each unit of wheat takes 3 units of corn.

2)a) Explain fishing.

why

common

property

leads

to

too

much

Common property leads to too much fishing because no one is excluded from using the resources the property, therefore labour is not optimized in the manner it would have been under private ownership. Under common property, workers would continue to join the fishing until the point: VAPl = $100 Where VAPl is the value of the average product of labour and is given by the equation Total product x Price/ Labour and $100 is what the fishermen would have earned at their next best alternative. This method however would lead to a net loss to society. Which is illustrated by : Labour 1 2 3 4 5 6 7 8 9 Total Product 13 25 36 46 55 63 70 76 81 VAPl 130 125 120 115 110 105 100 95 90

Looking at the table we see that VAPl= 100 at 7 labour, therefore fishermen will continue to join the until they reach 7 fishermen is equal to what they would have earned elsewhere. However, had the lake been privately held,the owner would have only employed labour to point where VMPl= w, where VMPL stands for Value of the marginal product of labour and is given by the equation : VMPL= P x MPl And MPl is given be : change in Q/ change in L And w represents wage.

Labour 1 2 3 4 5 6 7 8 9

Total Product 13 25 36 46 55 63 70 76 81

VMPl 130 120 110 100 90 80 70 60 50

Had the lake been firm been privately held the owner would have only hired 4 labours since at point VMPl= w. The remaining labour would have been more beneficial to society and productive used elsewhere.

b) Assume now that the lake is privately owned and the owner hires fishermen for $100 per day. How much fishing would the owner allow, and would it be an efficient allocation of resources. In order to find out how much labour the owner would hire we have to use VMPl and keep in mind that the owner would only hire to the point where VMPl= w, where VMPL= P x MPl and w= wage rate Labour 1 2 3 4 5 6 7 8 9 Total Product 13 25 36 46 55 63 70 76 81 VMPl 130 120 110 100 90 80 70 60 50

If the owner hires each fishermen at $100 then the owner will hire up to 4 fishermen since at that point VMPl is equal to w ( 100=100). Yes this is a more efficient allocation of resources because had this been publicly owned 7 fishermen would have fished the lake causing a net loss of 60 to society. Given by the MPl of each labour minus the $100 wage rate, then the total of each added up.

3) The steel industry must be protected from cheap foreign imports. If steel does not receive (tariff) protection, foreign imports will drive American producers out of business, thus reducing the number of jobs available to Americans. Explain why the person making this statement is ill informed about economic principles. What is the flaw in their reasoning?

If the US steel industry requires tariffs in order to stay competitive with foreign imports, this indicates US producers are inefficient in the production of steel and that their foreign competitors have a comparative advantage over them when it comes to producing steel. Comparative advantage exists when one producer has a lower opportunity cost when producing some good than another producer. In this case foreign producers of steel have a lower opportunity cost to produce steel than US steel producers do. Since foreign importers have a lower opportunity they could specialize in the production of steel and the U.S. could shift their resources to another good in which they have a lower opportunity cost to produce, making both sides more efficient and boosting both of their total outputs. This will make both sides more productive and will then create an incentive to trade.

4)NO the business had not been economically profitable to that point. Since Economic profits = Total Revenue Total Cost and Total Cost = forgone wage + forgone interest (10% on 20000) = 25000+ 2000 Total Revenue= 25000 Economic profits= 25000-27000 = -2000 From economical stand point that business was under by 2000$ at that point.