Question:  Principles of Macroeconomics

PART B: SHORT ANSWER QUESTIONS.

1. At a price of $5 per pound, salmon is quite attractive to buyers but not very profitable to sellers. The quantity demanded is 750 pounds, represented by point B on the demand curve (DD). However, the quantity offered for sale at that price is 250 pounds, which is represented by point A on the supply curve (SS). Thus, at price $5, there is an excess quantity demanded (shortage) of 500 (750-250) pounds. Suppose the $5 price is the result of government intervention in the market for salmon.

Draw this market scenario, showing the excess demand (Shortage) in the market. What would you recommend to eliminate the shortage in the market? Explain why your recommendation might be deemed acceptable.

2. At lunch, two non-economics majors, Chet and Ramona, engage in a heated argument. Their exchange goes like this:

Chet: "The supply of hybrid cars, and the demand for hybrid cars will both increase, I am sure of it. I'm also sure that the prices of hybrid cars will go down."

Ramona: "I agree with the first part of your statement, but I'm not sure about the price. In fact, I am pretty sure that the prices of hybrid cars will rise."

They go back and forth endlessly, each unable to accept the other's position, so they turn to you for advice. What would you say to them? Illustrate your advice to them using the demand and supply curves to show the equilibrium that informs your advice.

3A. List the typical assumptions underlying the production possibilities curve (PPC), and sketch a PPC using ay two products that comes to your mind. Then use the PPC to define economic growth. Also cite the sources of economic growth.

3B.The following production possibilities represent the productive capacities of two countries: Capedorba and Winnedorva. Are there opportunities for trade between the two countries?? If yes, then what should be the pattern of trade between them??