Exercises of Microeconomics 1

8/2/2019 Exercises of Microeconomics 1

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Exercises of Microeconomics 1

Mankiw et al, 5th Ed.

Enver Figueroa Bazn

Ch. 3

Problem 2

a. What each country can produce:

A worker USA JAPAN

Cars (units) 4 4

Grains (tons) 10 5

total workers 100,000,000

All workers USA JAPAN

Cars (units) 400000,000 400000,000

Grains (tons) 1,000000,000 500000,000

b. PPF

Grains (tons) PPF USA Grains (tons) PPF JAPAN

1,000,000,000

500,000,000

Cars (units) Cars (units

400,000,000 400,000,000


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c. Opportunity costs:

Opportunity cost USA JAPAN

For a car 2.5 tons of grain 1.25 tons of grain

For a ton of grain 0.4 cars 0.8 cars

d. No country has an absolute advantage in producing cars because they all have the samenumber of workers and each worker is able to produce the same number of cars (4), so that

in total both countries can produce the same number of cars a year (400 millions).

In grain production, the USA has the absolute advantage because it can produce twice asmuch as Japan.

e. Japan has a comparative advantage in producing cars because its opportunity cost in

terms of grain forgone is just 1.25 tons, while in the USA that cost is 2.5 tons. The USAhas a comparative advantage in producing grain because its opportunity cost in terms of

cars forgone is 0.4, half that in Japan.

f. Production without trade:

Without trade USA JAPAN Total production

Cars (units) 200000,000 200000,000 400000,000

Grains (tons) 500000,000 250000,000 750000,000

g. Considering that the opportunity cost of grain is less in the USA than in Japan, the USA

should devote more workers to produce grain. The excess in grain production over

consumption might be exported to Japan where workers would be reallocated to producecars. Lets suppose that all workers in the USA are reallocated to grain production, so the

total amount of grain produce in both countries would be 1 million tons. In Japan all

workers are put to produce only cars and then the total amount of cars for both countrieswould be 400 millions.

With trade USA JAPAN Total production

Cars (units) 0 400,000,000 400000,000

Grains (tons) 1,000000,000 0 1,000000,000


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Now, if the production is distributed as in the table below, each country still would have

200 million cars but more grain than before. Lets say that the USA keeps 600 million tons

of grain, 100 million tons more than before, and Japan gets 400 million tons, which means150 millions tons more. This way, with trade, both countries are better off, as it is shown in

the graphics below the table. The improvements in consumption work as if it corresponds

to expansions of the PPF in each country.

Consumption USA JAPAN Total consumption

Cars 200,000,000 200,000,000 400000,000

Grains 600000,000 400000,000 1,000000,000

Grains (tons) USA Grains (tons) JAPAN

1,000,000,000

600,000,000

500,000,000 500,000,000

400,000,000

250,000,000

Cars (units) Cars (units)

200,000,000 400,000,000 200,000,000 400,000,000

B

A

A

B

Problem 3

a.

Time devoted Pat Kris

Brewing beer (1 gl.) 4 6

Making pizza (unit) 2 4


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In 4 hours Pat Kris

Beer (gallons) 1.0 0.67

Pizza (units) 2.0 1.0

Opportunity cost Pat Kris

Beer 2.0 1.00

Pizza 0.5 0.67

Pats opportunity cost of making pizza is 0.5 (gallons of beer) because it takes to her 4hours to prepare a gallon of beer and in that time she would make 2 units of pizza, while

Kriss opportunity cost of making pizza is 1 (gallons of beer).

Pat has the absolute advantage in making pizza since she is faster and also has thecomparative advantage at making it since her opportunity cost is smaller (0.5 vs. 0.67).

b. Pat will trade away pizza for beer and Kris will give beer in exchange.

c. The lowest price of a unit of pizza in terms of beer forgone corresponds to Pat, and it is

0.5. This is also the lowest price at which pizza can be traded. The highest pricecorresponds to Kris and it is 0.67. So, the pizza price range for trade is [0.5, 0.67].

Problem 4

Total workers in Canada = 10 million

Each can produce 2 cars or 30 bushels of wheat.

a. The opportunity cost of every car is 15 bushels of wheat.

The opportunity cost of every bushel of wheat is 1/15 cars.The opportunity cost of a bushel is the inverse of the opportunity cost of a car.

b.

Without trade

Production & consumption

(A in the graphic)

Cars (units) 10,000,000

Wheat (bushels) 150,000,000


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With trade

Production

Cars (units) 20,000,000

Wheat (bushels) 0

Consumption (B in the graphic)

Cars (units) 10,000,000

Wheat (bushels) 200,000,000

If Canada accepts the deal of exchanging 10 million cars for 200 million bushels of wheat,

Canadians will be able to consume 50 million bushels of wheat more than without trade.

Therefore, Canada should accept this deal.

heat (bushels) Canada

300,000,000

200,000,000

150,000,000

Cars (units)

10,000,000 20,000,000

A

B


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Problem 6

a. Without trade between the two cities, the price of white socks in terms of red socks inBoston is 1, and in Chicago it is 2.

Per worker per hr Red socks White socks

Boston 3 3

Chicago 2 1

Opportunity cost Red socks White socks

Boston 1.0 1.0

Chicago 0.5 2.0

b. Boston has the absolute advantage in the production of each color sock. Boston also hasthe comparative advantage in producing white socks since its opportunity cost is half as

much as in Chicago. But, Chicago has the comparative advantage in red socks production

because they cost half than in Boston.

c. If they trade with each other, then Boston will export white socks and Chicago will

export red socks.

d. The price ranges to trade are:White socks: [1, 2]

Red socks: [0.5, 1]

Ch. 4

Problem 7

a. A hurricane damaging the cotton crops in South Carolina reduce the supply of

sweatshirts for every price the costumers are willing to pay. Then, this event is

represented by an inward movement of the Supply curve from So to S1.The results of that event are in increase in the sweatshirts price up to P1 and a reductionin the quantity demanded to Qd1, which in the new equilibrium equals the new quantity

supplied Qs1. The new equilibrium is represented by the point B in the graphic.


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Price Market of Swetshirts

S1 (with the hurricane)

S0 (with no wea

P1

Po

Do Qd, Qs

Qd1 = Q

s1 Q

do = Q

so

A

B

b. Since leather jackets are substitutes of sweatshirts, the fall in their price makes

people increase their purchase of this good and reduce those of sweatshirts, so themarket demand curve moves inward, to D1, and the new equilibrium will be at P2 and

the quantities Qd2 = Qs2, represented by the point C in the graphic.


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S0 (with no weather events)

P1

P2

D1 Do Qd, Qs

Qd2 = Q

s2

A

B

C

c. If all colleges require morning exercises, then the demand for sweatshirts will augment

to D2, leading the equilibrium to the point D in the graphic below, which might be near thepoint B, but as long we dont know exactly the magnitude of the curves movements, we

cant state that the market will return to the point B. In point D, the new price is P3 and the

corresponding quantities traded are Qs3 = Qs3.


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S0 (with no weather events)

P3

P2

D1 D2 Qd, Qs

Qd3 = Q

s3

A

C

D

d. With new knitting machines that are supposed to grow the supply of sweatshirts for each

price, the market supply will move outwards to S2 leading the point E in the figure, wherethe equilibrium will be at P4 and the quantities Qs4 = Qs4.


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S2

P3

P4

D1 D2 Qd, Qs

Qd4 = Q

s4

E

C

D

Problem 10

The consequences of a rise in the hot-dog price depends on the nature of the relationship

with the other goods considered.

Hog-dog is for Ketchup a complement, thus demand for ketchup will strongly reduce, as infigure (a), leading to a reduction in its price.

Then, as long as tomatoes are inputs for making ketchup, the demand for them will drop

also lowering its price, but not so much, as is (b), because there are still other uses fortomatoes.

Having more tomatoes available for making tomato juice, its supply at every price will

increase, leading to a reduction in the price of tomato juice and to an increase in itsquantities, as in (c).

Being tomato juice a substitute of orange juice, the cheaper tomato juice becomes, the

littler the demand for orange juice, then its price and quantities should decrease as in (d).


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(a) (b)

Price Market of Ketchup Price Market of Tomatoes

S0 S0

Po Po

P1P1

D1 Do Qd, Qs D1 Do Qd

Qd1 = Qs1 Qdo = Qso Qd1 = Qs1 Qdo = Qso

(c) (d)

Price Market of Tomato juice Price Market of Orange juice

S0

S1 S0

P0

P1Po

P1

Do Qd, Qs D1 Do Qd

Qdo = Q

so Q

d1 = Q

s1 Q

d1 = Q

s1 Q

do = Q

so

A

B

A

B

B

A

A

B

Exercises of Microeconomics 1

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