Problem Set 2 1. Explain the difference between absolute advantage and comparative advantage.

Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?

2. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers. Alphas Production Possibilities Frontier Omegas Production Possibilities Frontier
popcorn 300 275 250 225 200 175 150 125 100 75 50 25 25 50 75 100 125 150 175 200 225 250 peanuts 300 275 250 225 200 175 150 125 100 75 50 25 25 50 75 100 125 150 175 200 225 peanuts popcorn

Ddd d

a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A. b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts? c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now? d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

3. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and Jacque be better off if she pays him $45 per meal to fix her meals? Explain. 4. a. Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity.

Quantity Demanded Quantity Supplied Per Month Per Month $5 6,000 10,000 $4 8,000 8,000 $3 10,000 6,000 $2 12,000 4,000 $1 14,000 2,000 b. What is the equilibrium price and the equilibrium quantity? c. Suppose the price is currently $5. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. d. Suppose the price is currently $2. What problem would exist in the market? What would you expect to happen to price? Show this on your graph. 5. Fill in the table below, showing whether equilibrium price and equilibrium quantity go up, go down, stay the same, or change ambiguously. No Change in An Increase in A Decrease in Supply Supply Supply No Change in Demand An Increase in Demand A Decrease in Demand 6. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change. a. Winter starts, and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls. e. A better method of harvesting cocoa beans is introduced. f. The Surgeon General of the U.S. announces that hot chocolate cures acne. g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. h. Consumer income falls because of a recession, and hot chocolate is considered a normal good. i. Producers expect the price of hot chocolate to increase next month. j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.

Price