Homework 2 Answer Key Notes Correct answers highlighted in green explanation provided when deemed necessary by the instructor Q1 The figure below contains the PPF of country X in blue and the PPF of country Y in red for shoes and jeans Which of the following statements is true Country X has a comparative advantage over country Y in the production of shoes Country Y has a comparative advantage over country X in the production of jeans Country X has a comparative advantage in the production of both goods Country X has an absolute advantage in the production of both goods Explanation The last option is clearly true country X can produce more of either shoes or jeans than country Y To see why the other options are wrong remember that the slope of the PPF gives the opportunity cost of the good measured in the horizontal axis in this case jeans Also remember the steeper the PPF the largest the opportunity cost of the good on the horizontal axis Since country Y s PPF is steeper country Y has a larger opportunity cost of making jeans than country X does It follows that country X has a comparative advantage in the production of jeans while Y has a comparative advantage in the production of shoes This shows that the first three alternatives are incorrect Q2 Assume that Japan and Korea can switch between producing cars and producing airplanes at a constant rate and consider the following table Hours needed to make one Japan Korea According to the theory of comparative advantage Japan should specialize in the production of Plane 150 150 Car 30 50 cars and import planes airplanes and import cars both goods and import neither neither good and import both goods Explanation The opportunity cost of making a plane in Japan is 150 30 5 cars WHY Because in the 150 hours that it takes to make a plane Japan could have produced 5 cars which each take 30 hours while it is 150 50 3 cars in Korea Korea has the lower opportunity cost of making planes and therefore a comparative advantage in producing them This implies that Japan must have the comparative advantage in producing cars as its opportunity cost is 1 5 0 2 planes vs 1 3 0 33 planes for Korea Q3 The graph below represents the various combinations of ham and cheese in pounds that the nation of Bonovia could produce in a given month The nation of Cropitia has a comparative advantage over Bonovia in producing ham if Cropitia can produce more than 320 pounds of cheese per month Cropitia s opportunity cost of producing a pound of ham is less than 0 8 pounds of cheese Cropitia can produce more than 400 pounds of ham per month Cropitia s opportunity cost of producing a pound of ham is less than 1 2 pounds of cheese Explanation The opportunity cost of producing a pound of ham in Bonovia is equal to the slope of the PPF represented in the graph We have two points for that graph 0 320 and 400 0 It follows that the opportunity cost of producing a pound of ham in Bonovia is 0 8 pounds of cheese For Cropitia to have a comparative advantage over Bonovia in the production of ham Cropitia s opportunity cost of making ham must be less than 0 8 pounds of cheese Q4 Consider a world with just two countries A and B that produce only two goods cars and TVs Country A is larger and therefore can use 400 hours of labor per day Country B can only use 360 hours of labor per day It takes country A 4 hours to make one TV and 80 hours to make a car It takes country B 3 hours to make one TV and 90 hours to make a car The two countries currently have bans that prevent them from trading with one another and so much each produce both cars and TVs Country A currently produces 40 TVs and 3 cars per day while country B produces 60 TVs and 2 cars Suppose that if trade were possible each country would fully specialize in the production of the good in which it holds a comparative advantage and then trade 2 cars for 50 TVs per day What would be the daily gains from trade for each country Country A 0 TVs and 1 Car Country B 0 TVs and 1 Car Country A 10 TVs and 0 Cars Country B 10 TVs and 0 Cars Country A 0 TVs and 5 Cars Country B 120 TVs and 0 Cars Country A 50 TVs and 3 Cars Country B 70 TVs and 2 Cars Explanation Similar to problem 13 in HW1 Q5 Consider the market for hamburger restaurant meals in Oxford This market is most likely A perfectly competitive market A monopoly A monopsony A market of monopolistic competition Explanation It cannot be a perfectly competitive market burgers are not the same everywhere it also cannot be a monopoly more than one restaurant sells burgers finally it cannot be a monopsony more than just 1 person buys burgers in Oxford Q6 If the law of demand holds an increase in the price of a good will decrease quantity demanded decrease demand increase quantity demanded increase demand Q7 Let the table below represent the demand schedule of three consumers Jennifer Laura and Andrew in the market for some good Price 5 4 3 2 1 0 Jennifer 5 6 7 8 9 10 Laura 4 6 8 10 12 14 Andrew 11 13 15 17 19 21 Suppose that Jennifer Laura and Andrew are the only three consumers in that market Suppose that the price of the good increases from 2 to 4 Then quantity demanded in the market decreases by 10 units increases by 10 units decreases by 5 units increases by 5 units is impossible to compute because we need more information Explanation Quantity demanded in the market when P 2 is 8 10 17 35 Quantity demanded when P 4 is 6 6 13 25 Therefore when the price increases from 2 to 4 the quantity demanded decreases by 10 units Q8 Which of the following factors affecting quantity demanded is not held constant in a demand schedule Price Income Expectations Price of related goods Q9 Let D1 in the figure below represent the initial demand curve in the market for hotel rooms in Oxford on Fridays before home football games What could explain the shift of that demand curve to D2 A win in the previous game An increase in the price of the football tickets An increase in the price of hotel rooms A decrease in the price of gas Explanation Football tickets and hotel rooms in game weekends are complements in consumption for many Ole Miss fans An increase in the price of the tickets therefore decreases the demand for hotel rooms Note that a win in the previous game should shift the demand to the right an increase the price of hotel rooms would cause a movement along the demand curve and a decrease …