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ECON 1001
Homework 1
Total Points =100


1. Consider the following data on production in 2 countries:

Output Per Worker
Country A Country B
VCRs 5 20
Bananas 10 5


a) Which country has an absolute advantage in the production of VCRs? Briefly justify
your answer. (2 points)

b) Which country has an absolute advantage in the production of bananas? (2 points)

c) Solve for the opportunity cost of producing VCRs in Country A. (2 points)

d) Solve for the opportunity cost of producing VCRs in Country B. (2 points)

e) Which country has the comparative advantage in the production of VCRs? Briefly
justify your answer. (2 points)

f) Which country has the comparative advantage in the production of bananas? Briefly
justify your answer. (2 points)



2. Alexandra has determined that studying an hour for her economics quiz will improve her grade on
the quiz from 75 to 100. She also determines that this improvement is worth $20. In order to
study for an hour for her economics quiz, however, she will have to work one less hour at her
part-time job. Alexandra should:
a) study for the quiz as long as her hourly wage rate is less than $20.
b) study for the quiz as long as her hourly wage rate is more than $20.
c) study for the quiz only if her hourly wage rate is exactly $20.
d) not study for the quiz because earning a higher grade cannot have a dollar value.
(3 points)


3. Economic reasoning would argue that there is an opportunity cost to:
a) all choices.
b) more choices.
c) only choices that involve money.
d) only choices that do not involve money.
(3 points)

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4. When your wages rise the:
a) opportunity cost of an hour of work decreases.
b) opportunity cost of an hour of leisure stays the same.
c) cost of working increases.
d) opportunity cost of an hour of leisure increases.
(3 points)


5. Investment in capital goods is one way to increase the standard of living in the future.
Investment in capital goods, however, means that we must forgo consumption today. One
of the tradeoffs facing an economy is consumption today and consumption in the future.
The following table presents such a trade off. With this information we know that the
opportunity cost of which of the following is the greatest?

a) Increasing current consumption from 750 to 800.
b) Increasing current consumption from 650 to 750.
c) Increasing current consumption from 600 to 650.
d) Increasing current consumption from 550 to 600.
(3 points)

6. Given a production possibility curve for good X (on the x-axis) and good Y (on the y-axis),
the opportunity cost of increasing good X is greatest when the slope of the production
possibility curve is:
a) -6
b) -4
c) 6
d) 4
(3 points)

7. If no resources had a comparative advantage in the production of any good, the production
possibility curve would be:
a) bowed outward.
b) bowed inward.
c) a horizontal line.
d) a downward sloping straight line.
(3 points)

8. The explanation for the law of demand involves:
a) suppliers' ability to substitute inputs.
b) consumers' ability to substitute different goods.
c) the government's ability to set prices.
d) the market's ability to equate supply and demand.
(3 points)




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9. The law of supply states that, other things constant, there is:
a) an inverse relation between price and the quantity supplied.
b) an inverse relation between price and supply.
c) a direct relation between price and the quantity supplied.
d) a direct relation between price and supply.
(3 points)

10. USA Today noted that the destruction caused by three 2004 hurricanes, combined with the
already high real-estate prices, were making people reconsider retiring to Florida. The cost of
homeownership was increasing partly because past hurricanes had roughly doubled insurance
premiums statewide. Construction costs could rise due to stricter building codes. Some people,
however, did not expect the influx of retirees to change because the baby boom generation was
approaching retirement age and Florida had long attracted many retirees. Which factor could move
the supply curve to the left?
a) Increasing the number of people who are retiring.
b) Increase in the cost of insurance.
c) The already high real-estate prices.
d) Higher construction costs.
(3 points)

11. The supply of leather jackets would be expected to increase as a result of:
a) a decrease in the cost of producing leather jackets.
b) an increase in the price of leather jackets.
c) an increase in the popularity of leather jackets.
d) the expectation that the price of leather jackets will rise in the future.
(3 points)

12. Suppose a recent and widely circulated medical article reports new benefits of exercise.
Simultaneously, the price of the parts needed to make bikes falls. What is the likely effect on the
equilibrium price and quantity of exercise bikes sold?
a) Price of exercise bikes decreases and quantity sold remains the same.
b) Price of exercise bikes increases and quantity sold also increases.
c) Price of exercise bikes remains the same and quantity sold increases.
d) The change in price is ambiguous, but the quantity sold increases.
(3 points)

13. In the late 1990s "mad cow" disease caused people to buy less beef. It also caused the EU to ban
imported British beef and the British government to ban the sale of older cattle. What is the effect
of the following on price and quantity of British beef sold worldwide?
a) Price of British beef falls and quantity sold also falls.
b) Price of British beef rises and quantity sold falls.
c) Price of British beef falls initially, but regains some of its losses. Quantity sold initially rises,
then falls.
d) Price of British beef falls initially, but regains some of its losses. Quantity sold falls.
(3 points)

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14. In the 1990s, per capita income in China rose. In addition, computer manufacturers overcame the
enormous 13,000 character barrier to creating a workable keyboard through voice and handwriting
recognition making PCs more accessible to the Chinese. What was the predicted effect of the
events on equilibrium price and quantity of PCs sold in China?
a) Price fell initially, then rose (nearly erasing its previous decline); quantity fell and then rose.
b) Price fell initially, then rose (nearly erasing its previous decline); quantity rose continuously.
c) Price rose initially, then fell (nearly erasing its previous rise); quantity fell and then rose.
d) Price rose initially, then fell (nearly erasing its previous rise); quantity rose continuously.
(3 points)


15. Suppose that the market labor supply and labor demand equations are given by Qs =5W and Qd
=30 - 5W. If a minimum wage is set at $4.00 (W =4), then:
a) 15 workers will be supplied and demanded.
b) 20 workers will be supplied and demanded.
c) 20 workers will be supplied, but only 10 workers will be demanded.
d) 10 workers will be supplied, but 20 workers will be demanded.
(3 points)


16. In 2004 in the United States, 14 states had a minimum wage that was higher than the federal
minimum of $5.15 an hour, which had not been adjusted since 1997. In those states that impose
a minimum wage above $5.15 an hour, it is more likely that the minimum wage acts as a binding:
a) price floor, causing excess supply in the market.
b) price floor, causing excess demand in the market.
c) price ceiling, causing excess supply in the market.
d) price ceiling, causing excess demand in the market.
(3 points)


17. An increase in price and an indeterminate change in quantity are consistent with a:
a) leftward shift in demand and no shift in supply.
b) leftward shift in supply and no shift in demand.
c) rightward shift in supply and a leftward shift in demand.
d) leftward shift in supply and a rightward shift in demand.
(3 points)

18. In the early 1990s people began to recycle, but demand for recycled materials remained slim.
Companies then developed technologies that profitably turned recycled materials into new
products. Rising income increased people's demand for recycled products. What was the net
effect on price and quantity for recycled materials?
Please graph the diagram for recycled materials. Label the diagram and clearly indicate the
appropriate shift(s).
(10 points)


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19. In the mid 1990s, The Wall Street Journal reported a renewed interest in eating caviar. At the
same time, the supply of Russian caviar was shrinking following the collapse of Soviet
Communism. What was the most likely effect of theses events on the price and quantity of caviar
sold?
Please graph the diagram for caviar. Label the diagram and clearly indicate the appropriate
shift(s).
(10 points)


20. Suppose that the world consists of only 2 countries that produce only one good: watches.
Suppose that Countrys A demand and supply curves are given by:
Qd =60 - 2P
Qs =-10 +P
Suppose that Countrys B demand and supply curves are given by:
Qd =80 - 3P
Qs =-20 +P

a) Calculate the autarky equilibrium prices and quantities in each country. (8 points)

b) Provide the graphs with the equilibriums for each country. (4 points)

c) Which country has the comparative advantage in the production of watches? Which
country will be the exporting one? (2 points)

d) State the two conditions for a free-trade equilibrium. (2 points)

e) Calculate the prevailing world price and the exporting quantity. (4 points)