Question

1) Suppose three countries were self sufficient and produced along a straight line production possibility curve. The maximum amounts of clothing and cars each can produce by using all of its resources are as follows:

Canada Mexico United States

Clothing 6 15 30

Cars 20 20 30

a) What is the cost of a car, expressed in terms of clothing, in each country? Who has the comparative advantage in producing cars?

b)Draw the world’d production possibility curve and if

the three countries find themselves in an open economy.

Graph the marginal cost of of producing cars in this

simple economy. Make sure to explain each graph.

2) Suppose a lake is publicly owned, i.e. a common property resource, with free fishing for all. The number of fish caught varies with the number of people fishing as follows:

​Labour Total Product

1 13

2 25

3 36

4 46

5 55

6 63

7 70

8 76

9 81

Assume the market price of these fish is $10 per fish, and this price is not affected by the number of fish caught in this lake. Assume that all fishermen can earn $100 per day in their next best alternative. Assume the fishermen share equally in the proceeds of the lake.

a) Explain much fishing will occur ina common property setting i.e. how many people would join the fishery?

b) Assume now that the lake is privately owned and the owner hires fishermen for $100 per day. How much fishing would the owner allow i.e. how many people would join the fishery?

c) Why is the common property result considered to be inefficient?

3) “The steel industry must be protected from cheap foreign imports. If steel does not receive (tariff) protection, foreign imports will drive American producers out of business, thus reducing the number of jobs available to Americans.” Explain why the person making this statement is ill informed about economic principles. What is the flaw in their reasoning?

4) A. Gomez runs a small pottery firm. He hires one helper at $12,000 per year, pays annual rent of $5,000 for his shop,and spends $20,000 per year on materials. He has $40,000 of his own funds invested in equipment that could earn him $4,000 per year if alternatively invested. He has been offered $15,000 per year to work as a potter for a competitor. Total annual revenue from pottery sales is $72,000. What is the economic profit of Gomez’s pottery firm? Explain your reasoning.

B. You own a cigar company in Cuba. You produce 999 boxes of cigars per year. Your average cost per box is $1.00. Paul Martin offers you $5.00 to produce an extra box so that he can give it to his best friend George W. Bush. If you accept his offer you average costs per box will be $1.01. What should you do?

Answer 1

Answer 1(a) :-

Canada = 6/20=0.33 units of clothing per car

Mexico = 15/20=0.75 units of clothing per car

U.S. = 30/30= 1 unit of clothing per car

Canada has a comparative advantage in producing cars .

Answer 1 (b) :-

Answer 2a :-

Number of fishermen	Total fishes	Total Revenue	Public setting (per fishermen share )	Private setting ( Profit earned)
1	13	130	130	30
2	25	250	125	50
3	36	360	120	60
4	46	460	115	60
5	55	550	110	50
6	63	630	105	30
7	70	700	100	0
8	76	760	95	(40)
9	81	810	90	(90)

If the fishing occurs in a common property six fishermen will join fishing as after the seventh fisherman joins, the per person share reduces to dollar hundred which is the opportunity cost of the the fishermen that he could earnwhile working somewhere else. Therefore in a public setting and will join fishing.

Answer 2b :-

If the lake is on privately, then the the owner will hire 3 fisherman as after the fourth fisherman is being hired his total profit starts to reduce. Therefore the most optimal number of fishermen that should be hired by him to earn maximum profit of dollar sixty is 3 fisherman

Answer 2c :-

The the common property fishing is considered to be inefficient as as as the the extra profit earned by 6 fisherman after deducting the opportunity cost of Dollar hundred is $30 . while if the lake is owned by a private person then even after giving fisherman there share of dollar hundred the extra profit on his dollar 60 which is twice as compared to the common property setting.

Answer 3 :-

The steel tarrifs claim to protect 140000 workers however it does not take into account 6.5 million manufacturing workers whose job comes into to danger due to import tariff. As the US government has imposed 25% tariff on import of Steels. This has lead to Instant 25% price rise and the burden of this cost has been shifted to consumers by rising the prices of the goods . Thus the the cost of saving few workers has been largely imposed on a large amount of consumers consuming these products. Another threat is that these companies might shift to abroad where they can gain cheap materials, which will lead to lay off American workers and will work automatically in their disadvantage.

Answer 4a :-

Labour cost = $12000

Rent =$5000

Raw materials = $20000

Opportunity cost = 4000+15000)=$19000

Economic profit = 72000-56000=16000

Answer 4b :-

Total cost of producing 999 units = 999*1=$999

Total cost of producing 1000 units = 1000*1.1=$1010

Extra cost of producing 1 unit = 1010-999=$11

Revenue earned for extra unit =$5

Loss = 5-11=(6)

Thus the company should refrain from producing extra unit .