Eco 201 Name_______________________________ Hour Test 1 1 October 2004 100 points. Each question is worth 25 points, so allocate your time efficiently. Please write answers in ink. You may use pencil for drawing graphs. Good Luck. 1. Consider the information provided in the table below. Assume that the United States can produce 20 bundles of Christmas trees or 40 cases of oranges (or a linear combination of the two) in one week. Canada can produce 24 bundles of Christmas trees or 2 cases of oranges (or a linear combination of the two) in one week. Please show your work and explain all answers. Country Christmas Trees OrangesUnited States 20 40 Canada 24 2 a. Which country has a comparative advantage in the production of Christmas trees? b. Which country has a comparative advantage in the production of oranges? c. If each country produces Christmas trees for one week and then oranges for one week, show the total production of both goods. d. Now assume each country specializes for two weeks. Indicate the total production of both goods. Show that trade between the two countries after this two week period can allow both to consume more Christmas tress and oranges. 2. A journalist advocates that Congress should pass the National Energy Efficiency Act because it will mean reducing America’s dependence on foreign oil supplies: One easy way for Americans to stretch their supplies of energy is to buy a better toaster or air conditioner or refrigerator. They will be assured of that opportunity if Congress approves the National Energy Efficiency Act…. The administration [has] argued that the free market should be permitted to work its will and that mandatory minimum efficiency standards would force up the price of appliances. This is saying in effect that if Americans want to buy shoddy, energy-wasting appliances, that is their right. [Quoted in Allen, The Midnight Economist, p. 93] Can one conclude that greater energy efficiency will mean greater economic efficiency? Explain why or why not. 3. Consider public policy aimed at smoking. a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently sells for $3 and the government wants to reduce smoking by 20 percent, by how much should it increase price? Explain.b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or five years from now? Explain. c. Studies also find that the price elasticity of demand for cigarettes is higher for teenagers than it is for adults. Why might this be true? 4. International trade policy has become more newsworthy as political candidates seek more votes. Inez Tenenbaum and John Kerry have both promised to fight against future free trade proposals in order to protect American jobs. Soon after being elected in 2000, George Bush imposed tariffs an imported steel and softwood lumber. President Bush claimed that America was losing jobs because of unfair trade policies by countries that were exporting goods to the United States. As economists are fond of saying “there are no free lunches.” Who are the beneficiaries of policies that limit imports? Who gets harmed when the government limits foreign imports? Do the beneficiaries gain more than the losers lose?