Assignment -
Q1) Consider a country called Blarnia, which has 1200 units of labor available. It can produce two goods, apples and bananas. In Blarnia it takes 3 units of labor to produce one bushel of apples, but only 2 units of labor to produce a bushel of bananas.
a) Graph Blarnia's production possibility frontier.
b) What is Blarnia's opportunity cost of apples in terms of bananas?
c) In the absence of trade, what would the price of apples in terms of bananas be?
Suppose now there's also another country, Flopistan, with a labor force of 800. In Flopistan, it takes 5 units of labor to produce a bushel of apples, and one unit of labor to produce a bushel of bananas.
d) Graph Flopistans's production possibility frontier.
e) Suppose that when they are not trading, each country assigns half of its workers to the production of each product. Show this on the two countries' graphs.
f) Now show on the graphs (or you can make another graph if you prefer) a pattern of production and trade in the two countries that would allow both to be better off.
g) Within which bounds should the terms of trade lie for international trade to be profitable for both countries?
Q2) Suppose the magazine-printing industry (that is, the literal printing of the magazines, not making up the contents) is competitive and begins in a long-run equilibrium.
a) Draw a diagram describing the typical firm in the industry, indicating its costs production decision, revenues, costs and profits.
b) One of the firms, Super Printers, invents a new process that sharply reduces the cost of printing magazines. What happens to Super Printer's profits and the price of magazine printing in the short run when Super Printer's patent prevents other firms from using the new technology? Illustrate on the firm's diagram.
c) What happens in the long run when the patent expires and other firms adopt the new technology?
Q3) The US has sometimes had bans in place on the export of crude oil. Such policies have sometimes been criticized on the grounds that it just provides cheap crude oil for US refiners (firms who refine crude oil into gasoline) and that it results in higher profits for the refiners, without reducing gasoline prices for consumers. This question asks you to use our understanding of producer behavior to understand the validity of this criticism.
a) Draw the cost curves for a US refiner and for a refiner in another part of the world. Assume that the US refiners have access to inexpensive US crude oil and that other refiners must buy more expensive crude oil from other parts of the world. All of the refiners sell gasoline to the competitive world gasoline market, which has a single price. In long-run equilibrium, will this price depend on the costs faced by US producers or the costs faced by other producers? Explain. (Hint: US producers by themselves cannot supply the entire world market.) Draw new graphs that illustrate the profits earned by a US refiner and another refiner located elsewhere.
c) In this model, is there an effective subsidy to the US refiners? If there is, is it passed on to consumers? Explain carefully.
Q4) Suppose that a typical doctor's visit has a cost of $200, but that a person with health insurance pays only $30 out-of-pocket when she sees her doctor, and her insurance company pays the other $170. (The insurance company makes its money collecting premiums from this, and other, individuals.)
a) Draw the demand curve in the market for doctor visits. Show the quantity of visits demanded if each has a price of $200.
b) On the diagram, show the quantity of visits demanded if consumers pay only $30 per visit. If the cost of each visit to society is the total price of $200 and if individuals have health insurance as just described will total surplus be maximized? Explain carefully.
c) Health economists often blame the health insurance system for excessive use of medical care. Given your analysis, why might the use of care be viewed as "excessive" in the presence of health insurance?
d) What sort of policies might prevent this excessive use?