Homework #1

1. Math Review

Suppose that you have two straight lines on a coordinate plane and each line is described by two points. Points A (Y=1, X=2) and B (Y=2, X=4) belong to Line 1, while points C (Y=9, X=1) and D (Y=4, X=6) belong to Line 2.

a. Draw the two lines on the coordinate plane.
b. Find the slope of each line.
c. Find the vertical and the horizontal intercept of each line.
d. Find an equation for each line.
e. Find the coordinates of the intersection of the two lines by solving the two equations simultaneously.

2. Positive and Normative Statements

Identify whether the following statements are normative (N) or positive (P).

a. Today, the stock market witnessed a significant rise in the Dow, NASDAQ and S&P 500.
b. What we need is a government that spends tax money wisely.
c. Currently the unemployment rate is about 4.7%.
d. The government should lower farm subsidies to ensure fair play in the international agricultural market.

3. Comparative advantage and Absolute advantage

Suppose that both John and Jane like to grow tomatoes and green peppers in the backyard. In one month, John can grow in his backyard either 60 tomatoes and 0 peppers or 0 tomatoes and 30 peppers or any other combination lying on the line between these two points. In the same amount of time, Jane can grow in her backyard either 40 tomatoes and 0 peppers or 0 tomatoes and 10 peppers or any other combination lying on the line between these two points.

a. Assuming that there is no trade in vegetables between John and Jane, what is the price of 1 pepper in terms of tomatoes for John?
b. Assuming that there is no trade in vegetables between John and Jane, what is the price of 1 pepper in terms of tomatoes for Jane?
c. Who has the comparative advantage in the production of tomatoes? Who has the comparative advantage in the production of green peppers?
d. If they start trading with each other, what should John sell and what should Jane sell?
e. How much will they be willing to offer/accept for any transaction in peppers and tomatoes? (Hint: what is the range of prices in terms of tomatoes that John and Jane are willing to accept for one pepper?)

4. Production possibility frontier (PPF)

Wonderland produces two goods, CDs and DVDs. The graph above displays the country's PPF. Answer the following questions.

a. Which point displayed on the PPF is not a feasible production point for Wonderland?

b. If Wonderland is currently producing at combination A, what is the opportunity cost of producing 150 more DVDs?

c. If Wonderland is currently producing at combination C, what is the opportunity cost of producing 1 more CD?

d. What is happening to the opportunity cost of producing more DVDs if we move from point A to point C. Why?