Homework 2-

1. The domestic demand for computers is given by P = 10 - Q.  The domestic supply is given by P = Q.  The world price of computers is $3.

(a) First assume that this country is closed to world trade. Find the equilibrium price and quantity of computers.  Calculate the consumer and producer surplus in this case.

(b) Now assume that this country is open to world trade.  How many computers will they import?  Calculate the consumer and producer surplus.  Who gains and who loses by opening up to world trade?  By how much did the total surplus of the economy change as a result of opening to world trade?

(c) Now assume that the government imposes a quota on computer imports.  This quota raises the equilibrium price of computers in this country to $4.  What was the quota limit?  What quantity is purchased by consumers?  Calculate the consumer surplus, the producer surplus, the quota rent, and the deadweight loss after the imposition of this quota. 

(d) Now assume the government wants to use a tariff instead of a quota to restrict trade.  However, they want the equilibrium price and quantity to be the same as in part (c).  What would the tariff have to equal for them to do this?

2. Are the following sales or production counted as part of US Gross Domestic Product (GDP)?  Which are counted as a part of US Gross National Product (GNP)?  Explain your answers.

(a) An American company sells computer parts to Toshiba, a Japanese company, which are used to produce computers.

(b) Jackie buys food at the grocery store that was produced on a local farm.

(c) Seth buys a used car.

(d) Bob, an American citizen, opens a factory in Japan that produces televisions.

(e) Yuya, a Japanese citizen, works in the United States as a teaching assistant.

3. Janet owns a bakery that makes and sells bread.  She sells $25 worth of bread each day.  To simplify the problem, let's assume that the only ingredients in bread are flour and water.  Also assume that water is free.  Janet buys $15 worth of flour each day from a miller.  The miller produces the flour by grinding wheat, which he buys for $10 from a farmer.  The farmer incurs no monetary costs in growing the wheat.  Using the value added approach, calculate how the production of bread adds to GDP.  Indicate the value-added at each stage of the production process.

4. The table below shows the real GDP and population of a country in 2004, 2005, and 2006.

(a) Fill in the 4th column of the table.

(b) What was the growth rate of real GDP between 2004 and 2006? 

(c) What was the growth rate of real GDP per capita between 2004 and 2006?

5. State whether the following claims are true or false and explain your answer.

(a) Susan just turned 16 years old.  She does not have a job because she is a student.  She is not counted as part of the civilian labor force.

(b) Joe just left the military and got a job as a consultant.  This change will not affect the unemployment rate because he just switched jobs.

(c) Tim just got out of jail and does not have a job (he is, however, looking for a job).  The unemployment rate increased when Tim was released from jail.

6. Describe the 4 types of unemployment and give an example of each.