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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.
more is exchanged at a higher price. the quantity is going to decrease. A1-6 False Some of the prices of the grocery store items will increase because of increased demand. Cell phone Japan -3 Finland +4 “World” +1 The Gain of 1 cell phone can be shared (mutually beneficial). everyone must be self-sufficient. potential trading parties that have different in opportunity costs. region. With trade. This causes a decrease in both the equilibrium price and the equilibrium quantity exchanged. Therefore. This is due to there being a decreased demand for such items. A 1-7 True The stock prices are falling.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. each individual. However. there is a decrease in demand. Also. 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. As consumer income increases. Everyone has a comparative advantage in something. If the shift in the demand curve is greater than the shift of the supply curve. This leads to an excess demand which leads to an increase in pricing. A1-5 True Without trade. This rise in price causes a larger quantity to be supplied with the result that at the new equilibrium. can each benefit from trade by obtaining a good at a cost below their own opportunity cost. they can afford to buy higher quality items. So. then there will be an increase in both the equilibrium price and the equilibrium quantity exchanged. 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. Computer +1 -1 0 . we cannot predict whether more or less of the stock will be traded. If the opposite occurs. then the quantity is going to increase. 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. because the seller holding the stock wishes to sell more at a higher price. Inferior goods will decrease their prices to compete with higher quality products. A 1-8 False If there is an increase in the demand ( a rightward shift in the demand curve). the increase of consumer income leads to a decrease in the pricing of inferior goods. therefore.
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 .A1-9 the table below lists points on a production possibility frontier or PPF (sometimes called the production possibility boundary or PPB).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= .
Then. as we produce more x. This shift of resources will therefore lead to a small reduction in y. the amount of y that must be forgone to produce one extra unit of x rises. Plug in the number. d) The relative price per unit of x is given by. the opportunity cost of producing x rises as more x is produced. c) The opportunity cost per unit of x is given by. Some resources that may not be very useful for making y. we must shift more resources that are quite suitable for making y and maybe less suitable for making x. is very useful for making x. Therefore. Therefore. but a substantial increase in x.Let’s start from the point when production of x is zero. . However. and gradually shift more resources toward the production of x. the opportunity cost of x given this production point is 5 units of y.86 units of y. the relative price of x given this production point is 3. as we produce more and more x. Therefore. Plug in the number.
e) With trade. f) We do not expect the economy to remain at the production point in part d. the economy will be better able to provide x and y to its members by being opened to trade. By being opened to trade. . The point at which it should be produced should shift towards the left on the table given. the consumption possibility curve can lie beyond the production possibility curve. the economy will be able to provide units of x and y that was previously unattainable as shown in the graph. Yes.
This combination is unattainable without trade.For example. For example. if we choose to trade 21 y of our production of 7 x with the rest of the world. if we choose to produce 0 x and 55 y as shown in the PPF. a point outside of the PPF-without-trade will be possible. a combination of 7 x and (55-21 = 34) y will be achieved. .
then the price would be $10. QD = 0 100-10P=0 P=10 If consumption falls to 0. subbing in P=5 into the equation for QS.50.00 To find the equilibrium quantity. c) The price at which there will be no production has changed from $2. -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=2.00. the maximum amount that would ever be consumed would be 100.50 to $2.5 If production falls to 0. we find that the equilibrium quantity is 50. b) To find the equilibrium price.00 By setting P=0. then the price would be $2. Qs’ = -60+30P 0 = -60+30P P=2 .
and the unsuccessful supplier force the price down. The new producer is better off because before they joined the market. After joining the market. At P = 2. . they were not making any profit at all.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 made some profit which is better off than not making any money at all before they were in the market. An increase in supply creates a surplus at the initial equilibrium price. e) QS’ = QD -60+30P = 100-10P 40P = 40 P=1 The consumer is better off because the equilibrium prices decreased from $5.00. there is now excess supply.5. This drop in price increases the quantity demanded and the new equilibrium is at a lower price and a higher quantity exchanged.00 to $1. 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.
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