Review Problems and Questions

1. Suppose that only two goods are produced: capital goods (K) and consumer goods (C) in two economies. In the first economy the PPF is given by the equation 2K = -2C + 200 and in the second economy the PPF is given by the equation 3K = -4C + 600. Suppose that there is no trade between the two economies and furthermore, suppose that economy one produces 50 units of consumer goods and 50 units of capital goods while economy two produces 30 units of consumer goods and 160 units of capital goods.

a. What is the opportunity cost of producing one unit of consumer goods in the first economy?

b. What is the opportunity cost of producing one unit of consumer goods in the second economy?

c. Which economy has the comparative advantage in producing capital goods?

d. Suppose that both economies decide to allow trade with one another, if economy one alters their production to produce 10 more units of consumer goods while economy two alters their production to produce 10 less units of consumer goods will overall production increase, decrease, or remain the same? Provide specific answers to this question. (Assume that both economies continue to produce on their PPFs.)

2. For each of the following markets, decide what happens to the demand and supply curves and what the overall effect on the equilibrium price and equilibrium quantity is.

a. In the market for hotdogs the price of hotdog buns decreases.

b. In the market for bonds the wealth of individuals in the economy increases.

c. In the market for computers technology improves while simultaneously the wages of software engineers increase.

d. In the market for professional football players the NFL decides to add two new teams to the league.

e. In the market for wine doctors report that consumption of three to five glasses of wine a week improve overall health while simultaneously strong storms damage California vineyards.

f. In the market for fast food there is an increase in the minimum wage floor while simultaneously people's tastes and preferences for fast food diminish.

3. Suppose in the market for gasoline the demand curve is given by P = -2Q+ 1000 where Q is billions of gallons per year and price is price per gallon (in pennies). Furthermore suppose that the supply curve for this market is given by P = Q + 100.

a. What is the equilibrium price in this market?

b. What is the equilibrium quantity in this market?

c. What is the value of consumer surplus in this market?

d. What is the value of producer surplus in this market?

e. Suppose that an excise tax of 60 cents is placed on this good. What is the new equilibrium price with the tax?

f. Given the tax in (e), what is the new equilibrium quantity with the tax?

g. Given the tax in (e), what is the new net price that firms receive when they sell the good?

h. Given the tax in (e), what is the consumer tax incidence?

i. Given the tax in (e), what is the producer tax incidence?

j. Calculate the tax revenue from tax. Compare the tax revenue to the sum of the consumer tax incidence and the producer tax incidence: state your findings.

k. Given the tax in (e), what is the new value of the consumer surplus with the tax and the producer surplus with the tax?

l. Compare the original consumer surplus plus producer surplus (before the tax) to the consumer surplus with the tax plus the producer surplus with the tax: state your findings. Why are these two sums not equal to one another?

m. What is the value of the deadweight loss due to the imposition of the tax?

4. Which of the following is not included in GDP for Economy X during year 2002.

a. Construction of new homes in economy X during 2002.

b. The sale of a home in economy X built in 1976 by the owner (who is a teacher) of the house in 2002.

c. Garage sale receipts for the sale of a dining room set and a double bed frame in economy X during 2002.

d. The sale of marijuana to neighborhood kids in economy X during 2002.

e. The production of CD players in economy X for automobiles during 2002.

f. The sale of 100 shares of IBM stock in economy X during 2002using a Merrill Lynch broker.

5. Who is in the labor force? And is they are in the labor force are they employed or unemployed?

a. A woman works 10 hours a week in her family owned restaurant.

b. A 13 year old babysits every afternoon for her neighbor's two children.

c. A 40 year old man has quit looking for work because he believes there are no jobs available in his area.

d. A housewife applies for three jobs over the past three weeks but does not get hired at any of them.

e. A woman decides to not look for work even though she is available to work.

6. Decide whether each of the following is frictionally, structurally, seasonally, or cyclically unemployed.

a. A construction worker has not reported for work the past three months due to sub-freezing temperatures.

b. A telephone operator is told that her job is being replaced through automation.

c. Through videotaping of lectures the University decides it can eliminate four teaching positions. The individuals who hold these teaching positions lose their jobs.

d. A woman, after raising her children, seeks works and applies for fifteen jobs over the last two weeks.

e. A man, left his job three months ago and has submitted at least three applications a week since then for alternative employment.

f. Orders for a plant's product are down 12% necessitating the lay-off of twelve workers.