Management Economics

Prof. Farhad Nili

HW2
Due date: Monday (99/01/25) , (11:50 PM)
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1- Pat and Kris are roommates. They spend most of their time studying (of course), but they
leave some time for their favorite activities: making pizza and brewing root beer. Pat
takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6
hours to brew a gallon of root beer and 4 hours to make a pizza.

a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute
advantage in making pizza? Who has the comparative advantage in making pizza?

b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for
root beer?

c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest
price at which pizza can be traded that would make both roommates better off? What is
the lowest price? Explain.

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2- England and Scotland both produce scones and sweaters. Suppose that an English worker
can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can
produce 40 scones per hour or 2 sweaters per hour.

a. Which country has the absolute advantage in the production of each good? Which
country has the comparative advantage?

b. If England and Scotland decide to trade, which commodity will Scotland export to
England? Explain.

c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain
from trade? Would England still gain from trade? Explain.

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 3- A German worker takes 400 hours to produce a car and 2 hours to produce a case of
wine. A French worker takes 600 hours to produce a car and X hours to produce a case of
wine.

a. For what values of X will gains from trade be possible? Explain.

b. For what values of X will Germany export cars and import wine? Explain.

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4- Consider the markets for film streaming services, TV screens, and tickets at movie
theaters.

a. For each pair, identify whether they are complements or substitutes:

• Film streaming and TV screens
• Film streaming and movie tickets
• TV screens and movie tickets

b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a

diagram to show what happens in the market for TV screens.

c. Draw two more diagrams to show how the change in the market for TV screens affects
the markets for film streaming and movie tickets.

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5- Using supply-and-demand diagrams, show the effect of the following events on the
market for sweatshirts.

a. A hurricane in South Carolina damages the cotton crop.

b. The price of leather jackets falls.

c. All colleges require morning exercise in appropriate attire.

d. New knitting machines are invented.

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6- Because bagels and cream cheese are often eaten together, they are complements.

a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity
of bagels have risen. What could be responsible for this pattern—a fall in the price of
flour or a fall in the price of milk? Illustrate and explain your answer.

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 b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium
quantity of bagels has fallen. What could be responsible for this pattern—a rise in the
price of flour or a rise in the price of milk? Illustrate and explain your answer.

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7- For each of the following pairs of goods, which good would you expect to have more
elastic demand and why?

a. required textbooks or mystery novels.

b. Beethoven recordings or classical music recordings in general.

c. subway rides during the next 6 months or subway rides during the next 5 years.

d. root beer or water.