Exercises of Microeconomics 1 Mankiw et al, 5th Ed. Enver Figueroa Bazn Ch. 3 Problem 2 a.

What each country can produce:

A worker Cars (units) Grains (tons) USA 4 10 JAPAN 4 5

total workers All workers Cars (units) Grains (tons)

100,000,000 USA 400000,000 1,000000,000 JAPAN 400000,000 500000,000

b. PPF
Grains (tons) PPF USA Grains (tons) PPF JAPAN

1,000,000,000

500,000,000

Cars (units) 400,000,000 400,000,000

Cars (units)

c. Opportunity costs:
Opportunity cost For a car For a ton of grain USA 2.5 tons of grain 0.4 cars JAPAN 1.25 tons of grain 0.8 cars

d. No country has an absolute advantage in producing cars because they all have the same number of workers and each worker is able to produce the same number of cars (4), so that in total both countries can produce the same number of cars a year (400 millions). In grain production, the USA has the absolute advantage because it can produce twice as much as Japan. e. Japan has a comparative advantage in producing cars because its opportunity cost in terms of grain forgone is just 1.25 tons, while in the USA that cost is 2.5 tons. The USA has a comparative advantage in producing grain because its opportunity cost in terms of cars forgone is 0.4, half that in Japan. f. Production without trade:
Without trade Cars (units) Grains (tons) USA 200000,000 500000,000 JAPAN 200000,000 250000,000 Total production 400000,000 750000,000

g. Considering that the opportunity cost of grain is less in the USA than in Japan, the USA should devote more workers to produce grain. The excess in grain production over consumption might be exported to Japan where workers would be reallocated to produce cars. Lets suppose that all workers in the USA are reallocated to grain production, so the total amount of grain produce in both countries would be 1 million tons. In Japan all workers are put to produce only cars and then the total amount of cars for both countries would be 400 millions.

With trade Cars (units) Grains (tons)

USA 0 1,000000,000

JAPAN 400,000,000 0

Total production 400000,000 1,000000,000

Now, if the production is distributed as in the table below, each country still would have 200 million cars but more grain than before. Lets say that the USA keeps 600 million tons of grain, 100 million tons more than before, and Japan gets 400 million tons, which means 150 millions tons more. This way, with trade, both countries are better off, as it is shown in the graphics below the table. The improvements in consumption work as if it corresponds to expansions of the PPF in each country.

Consumption Cars Grains

USA 200,000,000 600000,000

JAPAN 200,000,000 400000,000

Total consumption 400000,000 1,000000,000

Grains (tons)

USA

Grains (tons)

JAPAN

1,000,000,000

600,000,000 500,000,000

500,000,000
A

400,000,000

250,000,000

Cars (units) 200,000,000 400,000,000 200,000,000 400,000,000

Cars (units)

Problem 3 a.
Time devoted Brewing beer (1 gl.) Making pizza (unit) Pat 4 2 Kris 6 4

In 4 hours Beer (gallons) Pizza (units)

Pat 1.0 2.0

Kris 0.67 1.0

Opportunity cost Beer Pizza

Pat 2.0 0.5

Kris 1.00 0.67

Pats opportunity cost of making pizza is 0.5 (gallons of beer) because it takes to her 4 hours to prepare a gallon of beer and in that time she would make 2 units of pizza, while Kriss opportunity cost of making pizza is 1 (gallons of beer). Pat has the absolute advantage in making pizza since she is faster and also has the comparative advantage at making it since her opportunity cost is smaller (0.5 vs. 0.67). b. Pat will trade away pizza for beer and Kris will give beer in exchange. c. The lowest price of a unit of pizza in terms of beer forgone corresponds to Pat, and it is 0.5. This is also the lowest price at which pizza can be traded. The highest price corresponds to Kris and it is 0.67. So, the pizza price range for trade is [0.5, 0.67]. Problem 4 Total workers in Canada = 10 million Each can produce 2 cars or 30 bushels of wheat. a. The opportunity cost of every car is 15 bushels of wheat. The opportunity cost of every bushel of wheat is 1/15 cars. The opportunity cost of a bushel is the inverse of the opportunity cost of a car. b.
Without trade Production & consumption (A in the graphic) Cars (units) Wheat (bushels) 10,000,000 150,000,000

With trade Production Cars (units) Wheat (bushels) 20,000,000 0

Consumption Cars (units) Wheat (bushels)

(B in the graphic) 10,000,000 200,000,000

If Canada accepts the deal of exchanging 10 million cars for 200 million bushels of wheat, Canadians will be able to consume 50 million bushels of wheat more than without trade. Therefore, Canada should accept this deal.
Wheat (bushels) Canada

300,000,000

200,000,000

150,000,000

Cars (units) 10,000,000 20,000,000

Problem 6 a. Without trade between the two cities, the price of white socks in terms of red socks in Boston is 1, and in Chicago it is 2.

Per worker per hr Boston Chicago

Red socks 3 2

White socks 3 1

Opportunity cost Boston Chicago

Red socks 1.0 0.5

White socks 1.0 2.0

b. Boston has the absolute advantage in the production of each color sock. Boston also has the comparative advantage in producing white socks since its opportunity cost is half as much as in Chicago. But, Chicago has the comparative advantage in red socks production because they cost half than in Boston. c. If they trade with each other, then Boston will export white socks and Chicago will export red socks. d. The price ranges to trade are: White socks: [1, 2] Red socks: [0.5, 1] Ch. 4 Problem 7 a. A hurricane damaging the cotton crops in South Carolina reduce the supply of sweatshirts for every price the costumers are willing to pay. Then, this event is represented by an inward movement of the Supply curve from So to S1. The results of that event are in increase in the sweatshirts price up to P1 and a reduction in the quantity demanded to Qd1, which in the new equilibrium equals the new quantity supplied Qs1. The new equilibrium is represented by the point B in the graphic.

Price

Market of Swetshirts

S 1 (with the hurricane)

S0 (with no weather events)

P1

Po

Do Qd 1 = Q s1 Qdo = Qso

Qd, Qs

b. Since leather jackets are substitutes of sweatshirts, the fall in their price makes people increase their purchase of this good and reduce those of sweatshirts, so the market demand curve moves inward, to D1, and the new equilibrium will be at P2 and the quantities Qd2 = Qs2, represented by the point C in the graphic.

Price

Market of Swetshirts

S 1 (with the hurrican e)

S0

(with no weather events)

P1 P2
C

D1 Q d2 = Qs2

Do

Qd, Qs

c. If all colleges require morning exercises, then the demand for sweatshirts will augment to D2, leading the equilibrium to the point D in the graphic below, which might be near the point B, but as long we dont know exactly the magnitude of the curves movements, we cant state that the market will return to the point B. In point D, the new price is P3 and the corresponding quantities traded are Qs3 = Qs3.

Price

Market of Swetshirts

S 1 (with the hurricane)

S0

(with no weather events)

P3 P2
C

D1 Q d3 = Qs 3

D2

Qd, Qs

d. With new knitting machines that are supposed to grow the supply of sweatshirts for each price, the market supply will move outwards to S2 leading the point E in the figure, where the equilibrium will be at P4 and the quantities Qs4 = Qs4.

Price

Market of Swetshirts

S 1 (with the hurrican e)

S2

P3
C

P4

D1 Qd4 = Qs4

D2

Qd, Qs

Problem 10 The consequences of a rise in the hot-dog price depends on the nature of the relationship with the other goods considered. Hog-dog is for Ketchup a complement, thus demand for ketchup will strongly reduce, as in figure (a), leading to a reduction in its price. Then, as long as tomatoes are inputs for making ketchup, the demand for them will drop also lowering its price, but not so much, as is (b), because there are still other uses for tomatoes. Having more tomatoes available for making tomato juice, its supply at every price will increase, leading to a reduction in the price of tomato juice and to an increase in its quantities, as in (c). Being tomato juice a substitute of orange juice, the cheaper tomato juice becomes, the littler the demand for orange juice, then its price and quantities should decrease as in (d).

(a)
Price Market of Ketchup

(b)
Price Market of Tomatoes

S0

S0

Po P1

Po P1
B

D1 Q1 =Q1
d s

Do

Qd, Qs Q 1=Q 1
d s

D1 Q o=Qo
d s

Do

Qd, Qs

Q o=Qo

(c)
Price Market of Tomato juice

(d)
Price Market of Orange juice

S0

S1

S0

P0

P1

Po
B

P1

Do Q o=Q o
d s

Qd, Qs Q 1=Q 1
d s

D1 Q o=Qo
d s

Do

Qd, Qs

Q1=Q1