1. Fill in the blanks. (a) Keynes said a good economist must be, in part, mathematician, historian, statesman, and philosopher.

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1 Econ Fall 2017 Problem Set 1 Due Date: 9/11/2017 Name (Print): Section / TA: PART-A Short Questions (10 points) 1. Fill in the blanks. (a) Keynes said a good economist must be, in part, mathematician, historian, statesman, and philosopher. (b) The four attributes that help to think like an economist are, thinking logically, separating signal from noise, thinking outside the box, and staying humble. (c) The population of the United States is 326 million. (d) 4.3 percent of the labor force in the United States is unemployed. (e) U. S. Jobs growth, year to date 2017, looks quite unremarkable, if we compare it to that in the recovery from the recession. (f) Opportunity cost is the highest valued alternative that must be given up to engage in an activity. (g) According to Adam Smith, markets, run by self-interested people, push Society toward desirable ends. (h) Economists look at income per capita, to give nation/states long run performance assessments. (i) A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed is called a free market. (j) A good for which the demand increases as the income falls and decreases as income rises is called an inferior good.

2 Econ Page 2 of 7 Problem Set 1 PART-B Comparitive Advantage vs. Absolute Advantage (30 points) 2. Consider the following two production possibility schedules Baseballs Soccer Balls (in thousands) (in thousands) Canada Brazil 1,500 3,600 (a) (3 points) What is the opportunity cost of producing one thousand soccer balls in Brazil? The opportunity cost of one soccer ball in Brazil is 1, 500/3, 600 baseballs 0.42 baseballs So the opportunity cost of one thousand soccer balls in Brazil is 420 baseballs (b) (3 points) What is the opportunity cost of producing one thousand baseballs in Canada? The opportunity cost of one baseball in Canada is 480/200 soccer balls 2.4 soccer balls So the opportunity cost of one thousand baseballs in Canada is 2,400 baseballs (c) (3 points) What is the opportunity cost of producing one thousand baseballs in Brazil? The opportunity cost of one baseball in Brazil is 3, 600/1, 500 soccer balls 2.4 soccer balls So the opportunity cost of one thousand baseballs in Brazil is 2,400 soccer balls (d) (3 points) What is the opportunity cost of producing one thousand soccer balls in Canada? The opportunity cost of one soccer ball in Canada is 200/480 baseballs 0.42 baseballs So the opportunity cost of one thousand soccer balls in Canada is 420 baseballs (e) (4 points) Which country has the comparative advantage in the production of soccer balls? Neither, as both Brazil and Canada have the same opportunity cost of 0.42 baseball per soccer ball (f) (4 points) Which country has an absolute advantage in the production of baseballs? Brazil has an absolute advantage in the production of baseballs as it can make more baseballs than Canada using the same inputs

3 Econ Page 3 of 7 Problem Set 1 (g) (10 points) Draw production possibility frontiers, assuming a linear tradeoff between baseballs and soccer balls for both countries. Then draw the combined production possibility frontier

4 Econ Page 4 of 7 Problem Set 1 PART-C Supply and Demand Analysis (40 points) 3. (20 points) The table below gives data on the electricity market at the end of 2015, in the United Kingdom. Price Quantity (per BTU) (of BTU) Coal 5 8 billion Solar 10 4 billion (a) (5 points) Label the graphs below so that we are in equilibrium. (One graph is for coal and the other is for solar)

5 Econ Page 5 of 7 Problem Set 1 Suppose there is a technological breakthrough in 2019, and the cost of producing electricity using solar panels plunges. Suppose in 2020, the market achieves a new equilibrium. Suppose the new equilibrium price per btu, in the market for solar power moves to 5. (b) (3 points) Did the supply curve or the demand curve shift for solar power? Supply Curve (c) (3 points) Did we move along the supply curve or the demand curve for solar power? Demand Curve (d) (3 points) Draw the shift in a graph below, so it correctly represents the new equilibrium. (e) (3 points) What is the new equilibrium quantity of solar electricity purchased? More than 4 billion (f) (3 points) Should we expect this to affect the market for coal? If so, is it because they are substitutes or complements? Yes, we would expect it affect the market for coal (decline in the demand for coal given technological breakthrough in solar) because they are substitutes.

6 Econ Page 6 of 7 Problem Set 1 4. (20 points) Consider the market for marmalades. In this market, the supply curve is given by Q s = 10P M 5P O and the demand curve is given by Q d = P M + 10P B, where M denotes marmalades, O denotes oranges, and B denotes butter. (12 points) (a) (5 points) Assume that P O is fixed at $1 and P B = 5. Calculate the equilibrium price and quantity in the marmalade market. Equilibrium is given by demand equals supply Q s = Q d 10P M 5 = P M 25P M = 155 P M = 6.2 Q d = Q d = 57 (b) (5 points) Suppose that a poor harvest season raises the price of oranges to P O = 2. Find the new equilibrium price and quantity of marmalade. Equilibrium is given by demand equals supply Q s = Q d 10P M 10 = P M 25P M = 160 P M = 6.4 Q d = Q d = 54

7 Econ Page 7 of 7 Problem Set 1 (c) (5 points) For part (b), identify the the curve that would shifts because of poor harvest. Illustrate in a graph below. Poor harvest will cause the supply curve for marmalades to shift left (d) (5 points) Suppose P O = 1 but the price of butter drops to P B = 3. Find the new equilibrium price and quantity of marmalade. Equilibrium is given by demand equals supply Q s = Q d 10P M 5 = P M 25P M = 135 P M = 5.4 Q d = Q d = 49