# ECONOMICS 110A/111

Due Dates and Notes:

# Assignment #1

2018/2019

· DUE: By Friday October 5, 2:00 PM. Completed assignments should be placed in the slot marked for your section in the white assignment collection box on the 2nd floor of Dunning Hall. Late assignments will not be accepted.

· Use the Cover Page when submitting assignments (download from the Assignments page on onQ). Place diagrams for particular questions with your answers to those questions (not all at the end).

· Group Work: Maximum four per group, all students must be registered in the same class. Names (as they appear on onQ) must be in alphabetical order on the cover page (last names first).

· Graded work will be available for pick-up beginning on Monday October 22 in the Econ Distribution Center, Dunning Hall Room 334. You will require your student card.

· This assignment covers material from Chapters 1, 2, 32 (pgs 775-788), and 3 of the text.

True, False, or Uncertain [48 marks - 6 marks each]

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.

A1-1. Your decision to spend Sunday afternoon working on your Econ course carries no opportunity cost.

A1-2. The circular flow of income and expenditure tells us that an increase household income is associated with an increase in the revenues flowing to firms.

A1-3. The statement: “Rainfall was ample this year so this should lead to high crop yields and low crop prices” is a positive economic statement based on a model in which the endogenous variables are the crop yields and prices and the exogenous variable is amount of rainfall.

A1-4. Suppose the output per unit of resources is 6 units of X OR 3 units of Y in country A, while the output per unit of resources is 12 units of X OR 4 units of Y in country B. B has an absolute advantage in the production of both goods and A has a comparative advantage in the production of good Y.

A1-5. Suppose the cost of producing a unit of X is \$6 in Alberta and \$12 in BC, while the cost of producing a unit of Y is \$3 in Alberta and \$4 in BC. BC has an absolute advantage in the production of both goods and Alberta has a comparative advantage in the production of good Y.

A1-6. Opening an economy to trade makes everyone in the economy better off.

A1-7. An increase in consumer incomes will lead to increases in the prices of all grocery store items.

A1-8. Since demand curves are downward sloping, we would never see an increase in price accompanied by an increase in the equilibrium quantity traded in a market.

Problems [52 marks - marks for each part as shown]

A1-9. Suppose the production possibility boundary (PPB) for a country that produces only two goods (x and y) is given by y = 100  x2. Therefore the slope of the PPB at any given level of good x production is -2x.

(a) How much y is produced if the economy produces no x? What is the maximum amount of x that can be produced? Sketch the PPB with x on the horizontal axis, and y on the vertical axis. [4]

(b) Explain why the (absolute value of the) slope of the PPB represents the opportunity cost of x. What might explain why the opportunity cost of x is increasing as more of it is produced? [4]

(c) Suppose the economy is currently producing 5 units of x and 50 units of y. Illustrate this production point in your diagram. What is the opportunity cost of x given this production point? Explain. [5]

(d) Now suppose that the economy is currently producing and consuming 8 units of x and 36 units of y. What is the opportunity cost of x? What would be the relative price of x (units of y per x)? [5]

(e) Now assume that the country is opened to trade with the rest of the world where the relative price of x is 10. Illustrate the economy’s consumption possibilities if the production point remains the same as in part (d). In which good does this economy have a comparative advantage? [4]

(f) Would you expect the economy to remain at the production point from part (d)? If not, at what point would it produce? Is the economy better able to provide x and y to its members by being opened to trade and pursuing its comparative advantage? [6]

A1-10. Suppose the monthly supply and demand curves for lamb in Canada are given by:

QS = -2 + 2P QD = 22 - 2P,

where QS and QD are the quantities in millions of kilograms and P is the price per kilo.

(a) Neatly graph the supply and demand curves being sure to identify the P and Q intercepts for the demand curve and the P intercept for the supply curve. [6]

(b) Calculate the equilibrium price and quantity. Identify these on your diagram. [4]

(c) Now suppose that, due to bad weather or disease, supply is decreased by 4 at any price. Write out the equation of this new supply curve and graph it in your diagram being sure to identify the new P intercept. [4]

(d) Explain why the price you calculated in part (b) is no longer the equilibrium price. [4]

(e) Calculate and identify the new equilibrium price and quantity. Has the quantity traded (equilibrium quantity) decreased by 4? Explain. [6]

The material in this assignment is copyrighted and is for the sole use of students registered in Economics 110, 111 and 112. The material in this assignment may be downloaded for a registered student's personal use, but shall not be distributed or disseminated to anyone other than students registered in Economics 110, 111 and 112. Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the University Senate's Academic Integrity Policy Statement.