Alex Smith Econ 202-006 Professor Timothy S.

Lambie-Hanson Problem Set 1 Answers

1) a. If the country Coperia is interested in higher levels of economic growth, their best strategy is to either produce many copy machines and few printed copies, or many printed copies and few copy machines. This way, they can specialize in one of those goods, and then trade for the other. Trade would allow their economy to grow; because they would be able to raise money from tariffs on their exports, and would be able to gain access to the goods they are not able to produce by importing that good from a trading partner country. b. Given the productivity table shown, the country with a comparative advantage in producing printed copies is Facsimilia, as it is able to produce 30 printied copies in the same amount of time as Coperia, which can only produce 10 in the given amount of time. Therefore Facsimilia has the comparative advantage. c. Given the production capabilities, Coperia should trade copy machines to Facsimilia. Both countries should specialize their goods, with Coperia producing copy machines and Facsimilia producing printed copies, since these are the goods in which both countries have comparative advantages. d. Facsimilia would still see gains from trade even though it does have an absolute advantage in both goods, because it does not necessarily have a comparative advantage in both goods. Facsimilia has a higher opportunity cost to produce copy machines than Coperia does. In order to produce 10 copy machines, Facsimilia would have to give up 30 printed copies. However, for coperia to produce 10 copy machines, they would only have to give up 20 printed copies, and therefore their opportunity cost is lower. Therefore, by specializing in the goods in which both respective countries have a comparative advantage would allow them to gain from trading with each other because they would each be producing the product which has the lowest opportunity cost for them, which helps their economy to be more efficient.

2) a. In this scenario, the equilibrium price would rise, as the demand for bottled water would increase. This demand increase would likely be met by a quantity decrease as bottled water producers would not be able to keep up with the

significant increase in demand caused by an impending hurricane. The increase in demand for bottled water would cause the demand curve to shift to the right, indicating an increase.

b. If the government were worried about price gouging in this situation, they would implement a price ceiling, which would limit the price that sellers could charge for the product. This would help keep costs for consumers down, but will cause the sellers to lose some potential profit, and can also even further increase demand, as the price is more manageable for consumers.

c. As the hurricane has destroyed over half of the watermelon crop, the supply for that crop has decreased significantly, which would cause the price to increase as the demand has not changed but there is now quite a bit less supply. Since we assume the pineapple crop has not been affected by the storm, people may decide to purchase pineapples instead of watermelons, because there is more supply of pineapples, the equilibrium price of pineapples would be lower than the watermelons, causing demand to increase for the pineapples. Since buyers are likely to switch from one fruit to the other as the price for each fluctuates, they could be considered substitutes.

d. The U.S. imposing a quota on pineapple imports would cause less pineapples to be imported, which would protect the Hawaiian producers by allowing them to supply more pineapples, and also allow those producers to make more money, at the expense of the consumers, who pay more.

3)

a. Qd = 10 2p Qs = 3p 10 2p = 3p 10 = 5p P= 2 Qd = 10 2p Qd= 10 2(2) Qd = 6 Qs = 3p Qs = 3(2) Qs = 6 Equilibrium quantity is 6 units. Qs=3p Qs=3(6) =18 Equilibrium price is $18. b. $2 Tax on consumers: Qd-2 = 10-2p Qd=12-2p 12-2p = 3p 12= 5p 2.4 = p Qd=12-2p Qd=12- 2(2.4) Qd= 7.2 Qs=3p 3(7.2) = 21.6 Equilibrium quantity now 7.2 units. Equilibrium Price with tax = $21.6

c. With a tax imposed, the consumer surplus falls because the consumer now pays more for the good. The producer surplus also decreases as a result of the tax, because the sales tax means they receive less for the good they are selling. The consumer surplus decreases by $8.80. d. The government revenue from the sales tax of $2 is $14.40 when the quantity sold is 7.2 units. The deadweight loss would be $3.60

4) The European Unions tariffs on agricultural imports primarily serve to benefit the agricultural producers of Europe, by imposing a tax any goods being imported to the EU. By taxing the foreign goods, there is less consumer demand for those goods because their price will be higher than the domestic-produced goods. The consumers generally would suffer from this because they will pay higher prices on the goods. In industries in which domestic production is suffering and not able to produce enough supply to meet the needs of the demand, it would be politically expedient to maintain high tariffs on those goods.