Macro-Economics Homework #1



Review of Ch. 1-4

Definition: Economics, Scarcity, Choice, Opportunity Costs, Production Possibilities Frontiers (PPF), Constant Opportunity Costs, Opportunity Costs, Comparative Advantage, Normative Economics, Positive Economics, Absolute Advantage, Marginal Cost, Marginal Benefit, Consumption tax, Income tax, Markets, Demand, Supply, Law of Demand, Law of Supply, Substitutes, Complements, Normal Goods, Inferior Goods, Shifts in the demand curve, Shifts in the supply curve, Market Equilibrium

Review Problems:

1. Using the above PPFs, answer the following trade questions:

1) Complete the following opportunity cost chart. (Be sure to include the units of measurement.)

|Opportunity Costs |Wheat |Jewelry |

|United States | | |

|Armenia | | |

2) Who has the advantage in producing each good?

|Advantage Type/Good |Computers |Cars |

|Absolute Advantage | | |

|Comparative Advantage | | |

2. American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.

1) For this situation, construct a table.

2) Graph the PPF of the American and Japanese economies.

3) For the US, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table.

4) Which country has an absolute advantage in producing cars? In producing grain?

5) Which country has a comparative advantage in producing cars? In producing grain?

3. Market research has shown that the supply and demand in a day for salmon (in pounds) in Boulder are Qd = 36 –P and Qs = P – 12. What is the equilibrium supply and demand?

4. If the quantity demanded of gasoline currently exceeds the quantity supplied, what is likely to happen in the market for gasoline?

5. Given that butter and margarine are substitutes and margarine and bread are complements, show what happens to the market for margarine when

a. The price of butter rises.

b. There is a new improved manufacturing process for margarine

6. Apples and bananas are substitutes. What happens to the market for apples when the price of bananas falls and a new pesticides are introduced to apple farming?

7. Steak is a normal good. What happens to the market for steak when incomes rise at the same time as there are fewer cattle farmers?

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Canada PPF per day

Turkey PPF per day

Wheat

Wheat

200

1000

100

Jewelry

Jewelry

50

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