# A1-1 False The opportunity cost of going skiing during reading week must include the value of the time

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.

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= .

Plug in the number. Plug in the number. we must shift more resources that are quite suitable for making y and maybe less suitable for making x. c) The opportunity cost per unit of x is given by.86 units of y. and gradually shift more resources toward the production of x. Therefore. the opportunity cost of x given this production point is 5 units of y. This shift of resources will therefore lead to a small reduction in y. d) The relative price per unit of x is given by. Therefore. . the relative price of x given this production point is 3. Then. Therefore. However. Some resources that may not be very useful for making y. is very useful for making x. but a substantial increase in x. the opportunity cost of producing x rises as more x is produced. as we produce more and more x. the amount of y that must be forgone to produce one extra unit of x rises. as we produce more x.Let’s start from the point when production of x is zero.

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 able to provide units of x and y that was previously unattainable as shown in the graph. 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. . Yes. the economy will be better able to provide x and y to its members by being opened to trade.e) With trade.

a point outside of the PPF-without-trade will be possible. if we choose to trade 21 y of our production of 7 x with the rest of the world. This combination is unattainable without trade. . if we choose to produce 0 x and 55 y as shown in the PPF.For example. a combination of 7 x and (55-21 = 34) y will be achieved. For example.

50.00 To find the equilibrium quantity.00. QD = 0 100-10P=0 P=10 If consumption falls to 0. then the price would be \$10. Qs’ = -60+30P 0 = -60+30P P=2 .50 to \$2.5 If production falls to 0.00 By setting P=0. we find that the equilibrium quantity is 50. b) To find the equilibrium price.A1-10 a) QS =0 -50+20P=0 20P=50 P=2. then the price would be \$2. subbing in P=5 into the equation for QS. the maximum amount that would ever be consumed would be 100. -50+20P = 100-10P 20P+10P = 50+100 30P = 150 P=5 The equilibrium price is \$5. c) The price at which there will be no production has changed from \$2.

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. they made some profit which is better off than not making any money at all before they were in the market.5. At P = 2.00 to \$1. they were not making any profit at all. 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. The new producer is better off because before they joined the market.00. and the unsuccessful supplier force the price down. This drop in price increases the quantity demanded and the new equilibrium is at a lower price and a higher quantity exchanged. there is now excess supply. .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. After joining the market.