Assignment: Macroeconomics

1. Define market failure.

2. Define the two types of externalities? Give real life examples of each?

3. When negative externalities exist does the market produce more or less than the optimal level of output?

4. When positive externalities exist does the market produce more or less than the optimal level of output?

5. How are negative externalities corrected (internalized)?

6. How are positive externalities corrected (internalized)?

7. What are the two characteristics of a public good?

8. If the graph below represents a negative externality situation, which of the two equilibriums, El or E2, would generate the socially optimal level of output and price? - Identify the corresponding prices and quantities.

9. Suppose country A and country B do enjoy comparative advantage between them. Their PPF are shown in the above diagrams.

a. Find the opportunity cost of 1 unit of N in terms of units of L for country A.
b. Find the opportunity cost of 1 unit of L in terms of units of N for country A.
c. Find the opportunity cost of 1 unit of N in terms of units of L. for country B.
d. Find the opportunity cost of 1 unit of L in terms of units of N for country B.
e. Which of the two countries has comparative advantage in production of N? Identify the terms of trade that would benefit both countries if they were to trade:
f. Country A should trade 1 unit of N for more than unit of L but less than units of L.
g. Country B should trade 1 unit of L for more than unit of N. but less than units of N.

10. Refer to diagram below: Domestic supply of and demand for sugar (in million tons).

a. How many tons of sugar will Americans purchase from U.S. suppliers at $200?
b. How many tons of sugar will Americans import from abroad at $200?
c. How much tariff revenue on sugar imports will the U.S. government collect at $200?
d. Using letters A-G identify both consumers' and producers' surplus at $200: Consumer surplus = . Producer surplus =
e. By removing the $50 per ton tariff Americans would buy tons of sugar from U.S. suppliers but demand a total of tons of sugar.
f. The removal of the $50 per ton tariff would make total imports = units of output