Homework #2

1. Each entry in the following table gives production information about two economies: Economy X and Economy Y. Assume that both economies have an equal number of hours available for production and equivalent amounts of resources.

a. What is the opportunity cost of producing a unit of sugar for Economy X?

b. What is the opportunity cost of producing a unit of wheat for Economy X?

c. What is the opportunity cost of producing a unit of sugar for Economy Y?

d. What is the opportunity cost of producing a unit of wheat for Economy Y?

e. Which economy has the absolute advantage in the production of sugar?

f. Which economy has the absolute advantage in the production of wheat?

g. Which economy has the comparative advantage in the production of sugar?

h. Which economy has the comparative advantage in the production of wheat?

i. Provide an example of how these two economies by specialization and trade can enhance the total amount of sugar and wheat available to them.

2. Consider the market for good X. Suppose the demand curve for this product is given by

P = 100 - 2Q

And the supply curve for this product is given by

P = 2Q + 4

a. What is the equilibrium quantity for this good?

b. What is the equilibrium price for this good?

c. What is the consumer surplus equal to for this good?

d. What is the producer surplus equal to for this good?

e. Consumer expenditure on this product equals.

The government decides that they would like to encourage consumption of this good. They decide that they will pay suppliers a subsidy for the production of this good in order to encourage both a higher level of production and a higher level of consumption. Suppose the government wants consumption of this good to be equal to 40 units.

f. What will be the equation for the new supply curve once the subsidy is in place?

g. What is the new equilibrium price for this good once the subsidy is in place?

h. What is the subsidy per unit equal to in this case?

i. What is the total cost of the subsidy to the government?

j. Suppose instead of paying the subsidy to producers, the government chose to pay the subsidy to consumers of the good. How would this change alter your results?

3. Briefly identify the following terms.

a. Real GDP

b. Aggregation

c. Double counting

d. Non-market activities

e. GNP

f. Full employment

g. Cyclical Unemployment

h. Expenditure Approach to GDP

4. Which of the following are unemployed (U), discouraged workers (D), employed (E), or not in the civilian labor force (N) according to official statistics?

a. A person who quits their job after deciding their wage rate is too low.

b. A single mother who after looking for a job for several months quits looking because she is convinced that she will not be able to find suitable work.

c. A full-time college student.

d. A recent high school graduate who is currently seeking employment.

e. A soldier in the Army.

f. A man who is institutionalized due to the severity of his mental illness.

g. A teenager who works without pay for 20 hours a week at their family-owned restaurant.

h. A man who is laid off at his manufacturing plant due to the implementation of a new robot-assembly line.

i. A woman who is laid off due to a reduction in orders for the product she produces.

j. A snow ski instructor works on their suntan May through October while waiting for the slopes to open.

k. A stay-at-home Mom who seeks employment now that her last child has left home.

l. For all those answers (a) through (k) that you marked as U, identify whether the individual is frictionally unemployed (F), cyclically unemployed (C), seasonally unemployed (S), or structurally unemployed (ST).

5. Select one of the Krugman essays (not the one you previously wrote about) and briefly discuss its main points. Evaluate the strength of Krugman's arguments: provide examples to support and defend your views.