IR 213: Professor Graham
Homework 1 - 2014 version
KEY
NOTE: Questions marked with a ** have been changed from the previous version
Xavier
30
Yadier
price
price
27
21
24
18
21
15
18
15
12
12
9
9
6
6
3
3
D
3
6
9
12
15
D
18
21
24
quantity
3
6
9 12 15 18 21 24 27
quantity
1. If these are the only two consumers in the market, then the market quantity demanded at a price of
$12 is: 9
2. Holding all other things constant, a lower price to play a round of golf would
a. decrease the quantity demanded of rounds of golf.
b. decrease the price of golf clubs.
c. increase the quantity of golf clubs sold.
d. increase the demand for other summer recreational activities.
**3. Suppose there is an increase in the price of corn. If corn is an input into the production of ethanol,
we would expect the supply curve for ethanol to
a. shift rightward.
b. shift leftward.
c. become flatter.
d. remain unchanged.
4. Today's supply curve for ipods could shift in response to a change in
a. today's price of ipods.
b. the expected future price of ipods.
c. the number of buyers of ipods.
d. All of the above are correct.
Explain: If the expected future price is high, producers may reduce supply today to
save up capacity, and vice-versa.
40
price
36
32
S
28
24
20
16
12
8
4
D
2
4
6
8
10
12
14
16
18
20
quantity
5. What is the equilibrium price and quantity in this market?
Price = 16 , Quantity = 8
**5b. If the government established price controls that set the price at $8:
**A. How many units would buyers demand? 12
**B. How many units would producers produce? 4
**C. Does this create a surplus or a shortage? How big of a surplus/shortage? Shortage of 8
units
6. A movement upward and to the left along a demand curve is called a(n)
a. increase in demand.
b. decrease in demand.
c. decrease in quantity demanded.
d. increase in quantity demanded.
**7. A decrease in the price of a good will
a. increase demand.
b. decrease demand.
c. increase quantity demanded.
d. decrease quantity demanded.
price
A
P
B
P'
D
Q
Q'
quantity
8. The movement from point A to point B on the graph shows
a. a decrease in demand.
b. an increase in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
Price
Supply A
Supply B
Supply C
Quantity
**9. Which of the following would cause the supply curve to shift from Supply C to Supply A in
the market for tennis racquets?
a. an increase in the price of tennis balls
b. an expectation by firms that the price of tennis racquets will increase in the very
near future
c. a decrease in the price of tennis racquet strings
d. a decrease in the number of firms selling tennis racquets
Price
S
10
9
8
7
6
5
4
3
2
1
D
1
10a..
a.
b.
c.
d.
2
3
4
5
6
7
8
9
10
Quantity
At a price of:
$2, there is a surplus of 6 units.
$5, there is a surplus of 25 units.
$5, there is a shortage of $25.
$7, there is a surplus of 4 units.
10. At what price would there be a shortage of 6 units? $2
11. All else equal, what happens to the equilibrium price of cars if the price of steel
increases? What happens to the equilibrium quanitity? E. Price Increases, E. quantity
decreases
12. If a drought destroys the wheat crop, what happens to the demand for corn? What
happens to the price of corn? What happens to the supply of bread? What happens to the
price of bread? What happens to the demand for wheat? Demand for corn goes up, Price of
corn goes up, supply of bread goes down, price of bread goes up. Nothing happens to the
demand for wheat.
Table 2.2. Output possibilities for South Korea and Japan
Country
South Korea
Japan
Output per worker per day
Tons of steel
VCRs
80
40
20
20
**13. Referring to Table 2.2, the opportunity cost of one VCR in South Korea is: (Hint: How many
tons of steel?) 2 tons of steel
14. Refer to Table 2.2. According to the principle of absolute advantage, Japan should:
a. Export steel
b. Export VCRs
c. Export steel and VCRs
d. None of the above; there is no basis for gainful trade
15. Refer to Table 2.2. With international trade, what would be the maximum amount of steel that
South Korea would be willing to export to Japan in exchange for each VCR? 2 tons (just less
than 2 tons)
16. Refer to Table 2.2. With international trade, what would be the maximum number of VCRs that
Japan would be willing to export to South Korea in exchange for each ton of steel? 1 (just less
than 1)
17. Concerning international trade restrictions, which of the following is false? Trade restrictions:
a. Limit specialization and the division of labor
b. Reduce the volume of trade and the gains from trade
c. Cause nations to only export goods when they have absolute advantage
d. May result in a country producing some of the product of its comparative disadvantage
Figure 2.1. Production Possibilities Schedule
18. a.Referring to Figure 2.1, the relative cost of steel in terms of aluminum is: ½ (i.e. 1 ton of steel
costs ½ ton of aluminum)
b. The relative cost of aluminum in terms of steel is:: 2 (i.e. 1 ton of aluminum costs 2 tons
of steel)
19. Refer to Figure 2.1. If the relative cost of steel were to rise, then the production possibilities schedule
would:
a. Become steeper
b. Become flatter
c. Shift inward in a parallel manner
d. Shift outward in a parallel manner
20. Explain in 2-4 sentences the difference between a change in demand (i.e. the demand
curve) and a change in the quantity demanded.
A change in demand is a change in the amount that buyers in the market are willing
to buy at a given price. It is a change in the willingness to pay. It is a movement of the
demand curve itself. A change in the quantity demanded is a movement along the
demand curve. As the price goes down, the quantity demanded goes up, and viceversa.
21. What are three things that might increase the supply of wooden chairs in the US (i.e.
shift the supply curve to the right)?
(many correct answers) However “increase in price” or “increase in demand” would
NOT be correct. These items increase the quantity supplied, but do not move the
supply curve.
19. Explain in 3-6 sentences how a country can gain from trade even if its trading partner
has an absolute advantage in all products.
A country can gain from trade as long as it has a comparative advantage in some
product – in other words, as long as its production possibilities frontier is not
identical to the other country for all products – as long as two countries are different
from one another, they can benefit from specialization in trade. Even if a country is
inefficient at making everything, it should specialize in making the things at which it
is least inefficient (relative to its trading partner) and exchange those goods for the
goods it is most inefficient at making (again, relative to the trading partner.
21. Bonus:
Given a two-country and two-product world, the United States would enjoy all the attainable gains from
free trade with Canada if it:
a. Trades at the U.S. rate of transformation
b. Trades at the Canadian rate of transformation
c. Specializes completely in the production of both goods
d. Specializes partially in the production of both goods
Explain your answer. Trading at the Canadian rate of transformation means that the
Canadians would be just as well off not trading at all – they are indifferent. The US is
getting the best possible price before the Canadians would just produce it all
themselves.