Question 1
a. Explain the importance of the ceteris paribus or "other-things-equal" assumption.
b. Give one example of a positive economic statement and one example of a normative economic statement.
c. What roles do freedom of enterprise and freedom of choice play in capitalism? How important are they to the operation of a competitive market economy?
d. What are the economic advantages of the division of labour?
Question 2
a. "The international flow of goods helps compensate for the international immobility of resources." Analyze and explain.
Answer the next three questions on the basis of the following production possibilities data for Narnia and Somosa. All figures are in thousands of units.
Narnia production possibilities:
A B C D E
Computer chips 80 60 40 20 0
Fuel injectors 0 20 40 60 80
Somosa production possibilities:
A B C D E
Computer chips 40 30 20 10 0
Fuel injectors 0 20 40 60 80
b. If trade occurs between Narnia and Somosa, which nation should export what product? Why?
c. What are the limits of the terms of trade between Narnia and Somosa?
d. Assume that prior to specialization and trade, Narnia and Somosa chose production possibility "C." Now each specializes according to comparative advantage. What will be the resulting gains from trade? Explain your answer.
Question 3
a. How can technological advance result in creative destruction?
Assume that a firm can produce product A, product B, or product C with the resources it currently employs. These resources cost the firm a total of $100 per week. Assume, for the purposes of this problem, that the firm's costs cannot be changed. The market prices and the quantities of A, B, and C these resources can produce are given below.
Product Market price Output Profit
A $10.00 6 $____
B 5.00 19 ____
C 1.50 100 ____
b. Compute the firm's profit when it produces A, B, or C and enter these data in the table.
c. Which product will the firm produce?
d. Suppose the quantity of product B the firm was able to produce with the same amount of inputs now rose to 25. Which product will the firm now produce?
e. As a result of the rise in quantity of product B to 25 that each firm can produce, what will happen to the number of firms producing product B?
Question 4
a. The market supply curve of rubber erasers is given by QS = 35,000 + 2,000P. The demand for rubber erasers can be segmented into two components. The first component is the demand for rubber erasers by art students. This demand is given by qA = 17,000 - 250P.
The second component is the demand for rubber erasers by all others. This demand is given by qO = 25,000 - 2000P. Derive the total market demand curve for rubber erasers. Find the equilibrium market price and quantity.
b. Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity. Identify the determinant of demand or supply that causes the shift and show the shifts graphically for each example.
i. Blue jeans. The wearing of blue jeans becomes less fashionable among consumers.
ii. Computers. Parts for making computers fall in price because of improvements in technology.
iii. Lettuce. El Nino produces heavy rains that destroy a significant portion of the lettuce crop.
iv. Chicken. Beef prices rise because severe winter weather reduces cattle herds.
Question 5
Demand is represented by the equation, P = 80 - .3QD and supply by the equation P = 30 + .2QS.
a. Determine the equilibrium price and quantity.
b. What are the economic effects of a price ceiling at $41?
c. What are the economic effects of a price ceiling at $72?
d. What are the economic effects of a price floor at $62?
e. What are the economic effects of a price floor at $37?