Economics 102Homework #2Spring 2011Due 2/14/11Directions: The homework will be collected in a box before the lecture. Please place your name, TA name, and section number at the top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Please remember the section number for the section you are registered for, because you will need that number when you submit exams and homework. Late homework will not be accepted so make plans ahead of time. Please show your work. Good luck!1. Absolute Advantage and Comparative AdvantageThe following is From Elements of Political Economy , Chapter III, Section IV, by John Stuart Mill. First published 1821:If two countries can both of them produce two commodities, corn, for example, and cloth, but not bothcommodities, with the same comparative facility, the two countries will find their advantage inconfining themselves, each to one of the commodities, bartering for the other. If one of the countriescan produce one of the commodities with peculiar advantages, and the other with peculiar advantages,the motive is immediately apparent which should induce each to confine itself to the commodity whichit has peculiar advantages for producing. But the motive may no less exist, where one of the twocountries has facilities superior to the other in producing both commodities.By superior facilities, I mean, the power of producing the same effect with less labour. The conclusion,too, will be the same, whether we suppose the labour to be more or less highly paid. Suppose thatPoland can produce corn and cloth with less labour than England, it will not follow that it may not bethe interest of Poland to import one of the commodities from England. […] if, at the same time that thequantity of cloth, which, in Poland, is produced with 100 days' labour, can be produced in England with150 days' labour; the corn, which is produced in Poland with 100 days' labour, requires 200 days'labour in England; in that case, it will be the interest of Poland to import her cloth from England. Theevidence of these propositions may thus be traced.[…] while the cloth produced with 100 days' labour in Poland was produced with 150 days' labour inEngland, the corn which was produced in Poland with 100 days' labour could not be produced inEngland with less than 200 days' labour; an adequate motive to exchange would immediately arise.With a quantity of cloth which England produced with 150 days' labour, she would be able to purchaseas much corn in Poland as was there produced with 100 days' labour; but the quantity, which was thereproduced with 100 days' labour, would be as great as the quantity produced in England with 200 days'labour. If the exchange, however, was made in this manner, the whole of the advantage would be on thepart of England; and Poland would gain nothing, paying as much for the cloth she received fromEngland, as the cost of producing it for herself.But the power of Poland would be reciprocal. With a quantity of corn which cost her 100 days' labour,equal to the quantity produced in England by 200 days' labour, she could in the supposed casepurchase, in England, the produce of 200 days' labour in cloth. The produce of 150 days' labour inEngland in the article of cloth would be equal to the produce of 100 days' labour in Poland. If, with theproduce of 100 days' labour, she could purchase, not the produce of 150, but the produce of 200, shealso would obtain the whole of the advantage, and England would purchase corn, which she couldproduce by 200 days' labour, with the product of as many days' labour in other commodities. 1a. Assume "peculiar advantage" stands for "absolute advantage" in our up to dateterminology. What does the assertion in the last sentence of the first paragraph refer to?b. Plot the PPF curve of both Poland and England according to the example in the text. In your graph measure corn on the horizontal axis and cloth on the vertical axis. Assume each of the countries is endowed with 600 days of labor, and that the PPF of the two countries are linear.c. For both goods describe which country has the comparative advantage and the absolute advantage.d. Use the text to describe what are the ratios of corn to cloth, in which Poland and England can trade while maintaining beneficial trade for both countries. 2. Math Review - Linear Equations Linear relations between two variables can be expressed in few ways. Let us summarize these ways in the following definitions:Graphic – using a line plotted on a specified axis system.Algebraic – using an equation that relates the two variables and contains both slope and the intercept as parameters. Numeric – specifying at least two points (x1, y1) and (x2, y2) that lie on the line in the graphical description, or that satisfy the algebraic relation.In the following table there are different descriptions of lines. Complete the missing information in the table. The first row is already completed for you.Algebraic Numeric Graphic2a. y= 3x+5(x1, y1)= (1, 8)(x2, y2)= (4, 17)b. ?(x1, y1)= (0 ,5)(x2, y2)= (1 ,2)c. x= - (1/3)y+(5/3) ? ?d. y= 2x-? (x1, y1)=(1,-5) ?e. ? ?3f. ? (x2, y2)= (0, 0)g. y= ?x-2 (x1, y1)=(1.5,1) ?h. (y/3x)= ? (x2, y2)=(8,24) ?3. Supply, Demand and TaxesThe government wishes to raise money through an excise tax levied on producers of cigarettes. The purpose of the tax is to buy medical equipment to fight health problems that arise as a result of smoking. The more people smoke, the more health problems there are, and in particular the total cost of handling the health problems is C=8*Q, where Q is the quantity of cigarettes consumed in the market and C is the total cost to society of smoking. The demand and supply curves in the cigarette market (before any tax is introduced to the economy) are the following:Demand: P = 80 -5*QSupply: P = 3*Qa. What is the equilibrium price and quantity in this market before any government intervention?b. After the tax is introduced what happens to the supply and demand curves? Doany of the curves shift? If so, in which direction?c. What is the equilibrium price and quantity in this market after the government introduces the tax? [Hint: If the total cost is 8*Q, then the cost per unit would 4be equal to
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