Economics 101 L Homework No. 3 (due in lab on Sept. 19, 2001)

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1 Economics 101 L Homework No. 3 (due in lab on Sept. 19, 2001) 1. Gilligan and the Skipper live on an island. The following table represents their output in a day of work. Turtles Coconuts Gilligan 30 6 Skipper a. Who has an absolute advantage in producing turtles? b. Who has an absolute advantage in producing coconuts? c. For Gilligan what is the opportunity cost of a coconut? d. For Gilligan what is the opportunity cost of a turtle? e. For the Skipper what is the opportunity cost of a coconut? f. For the Skipper what is the opportunity cost of a turtle? g. Fill in the following table. Turtles Coconuts OC Turtles OC Coconuts Gilligan 30 6 Skipper h. Who has the lowest opportunity cost for turtles? i. Who has a comparative advantage in producing turtles? j. Who has the lowest opportunity cost of coconuts? k. Who has a comparative advantage in producing coconuts? 2. Brazil and Argentina can both produce soybean and cattle. The following data represents the cost of producing

2 each item valued in the local currency. Soybean are measured in bushel, cattle in head. Cost per unit data Soybean (per bushel) Cattle (per head) Brazil 9 real 1440 real Argentina 5 pesos 750 pesos a. What is the opportunity cost of producing one more head of cattle in Brazil? b. What is the opportunity cost of producing one more head of cattle in Argentina? c. What is the opportunity cost of producing one more bushel of soybean in Brazil? d. What is the opportunity cost of producing one more bushel of soybean in Argentina? e. Fill in the following table. Soybean (per bushel) Cattle (per head) OC Soybean OC Cattle Brazil 9 real 1440 real Argentina 5 pesos 750 pesos f. Which country has a comparative advantage in producing cattle? g. Which country has a comparative advantage in producing soybean?

3 3. Below are hypothetical inverse supply and demand equations corresponding to Energy bars. Demand: Price = Quantity = a + b Q = 8-0.5Q Supply: Price = Quantity = c + d Q = Q a. What is the equilibrium price and quantity in this market? b. Create a spreadsheet table with the demand and supply parameters, the computed equilibrium quantity and price, and columns specifying the demand and supply prices associated with different quantities. The spreadsheet should look like the following. Inverse Demand Inverse Supply a 8 c 1 b -0.5 d 0.2 EQ EP Q P D Q P S c. Draw a computer-generated graph of these two equations by putting Quantity on the horizontal axis, and Price on the vertical axis. d. At Price = $5/unit, is there a shortage or a surplus? Calculate algebraically the amount of shortage or surplus. e. At Price = $2/unit, is there a shortage or a surplus? Calculate algebraically the amount of shortage or surplus. f. At Price = $3/unit, is there a shortage or a surplus? Calculate algebraically the amount of shortage or surplus.

4 4. The following quote appeared in The Wall Street Journal on July 8, 1993: A bumper crop of oranges in Florida last year drove down orange prices. As juice marketers costs fell, they cut prices by as much as 15%. That was enough to tempt some value-oriented customers: unit volume of frozen juices actually rose by about 6% during the quarter. a. Assuming that there were no changes in demand shifters for frozen orange juice, calculate the price elasticity of demand for frozen orange juice. b. Is the demand for frozen orange juice elastic, unit elastic, or inelastic? Why? c. Did consumers total spending on frozen orange juice increase, decrease, or stay constant? Why?

5 5. Below are hypothetical inverse supply and demand equations corresponding to oranges: Supply: Demand: Price = Quantity Price = Quantity a. Draw a computer-generated graph of these two equations by putting Quantity on the horizontal axis, and Price on the vertical axis. The spreadsheet could be set up as follows. Let quantity run from 0 to 100 in increments of 5. Demand Supply A B EQ EP Q Demand Supply Price Price b. At Price = $20/unit, is there a shortage or a surplus? Calculate algebraically the amount of shortage or surplus. c. At Price = $50/unit, is there a shortage or a surplus? Calculate algebraically the amount of shortage or surplus. d. Find the intersection of the two equations graphically and algebraically. What is the equilibrium quantity for oranges?

6 e. What is the price of oranges in equilibrium? f. Calculate the price elasticity of demand as price changes from $50 to $60. Is orange demand elastic or inelastic? g. Calculate the price elasticity of supply as quantity changes from $50 to $60. Is orange supply elastic or inelastic?

7 6. Using the graph you created for problem #5 as a starting point and by changing the appropriate parameters, show (if applicable) the shifts in the demand and/or supply of oranges, along with the corresponding changes in equilibrium prices and quantities, induced by the following hypothetical events: a. Pesticide residues on oranges are found to be too high for safe orange consumption by children. b. A new orange variety with higher yields is released. c. An increase in the price of apples. d. A reduction in the price of insecticides for oranges. e. It is discovered that apples increase the risk of heart disease. f. There is a very damaging freeze in the regions producing oranges.

8 7. Consider the following figure: a. Which movement reflects how consumers would react to an increase in the price of canola oil? From Y to X? From Y to V? From Y to W? From Y to Z? b. Which movement reflects a decrease in population? From Y to X? From Y to V? From Y to W? From Y to Z? c. Which movement reflects a decrease in the price of soybean oil? From Y to X? From Y to V? From Y to W? From Y to Z? d. Which movement reflects a fall in the price of potatoes? From Y to X? From Y to V? From Y to W? From Y to Z? (Note: Potatoes are complements of soybean oil, for example, to cook French fries and chips.) e. Suppose that consumers like soybean oil better now because recent research results indicate that people who consume soybean oil regularly live longer. Which movement reflects this change in consumer taste? From Y to X? From Y to V? From Y to W? From Y to Z?