Question

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate.

112-A1-1. Suppose high-speed rail links between two pairs of cities cost a total $1B each. The first pair of cities has already spent $200M (that cannot be recovered) on the preliminary surveying work, while the second pair has not yet begun work. It is more likely that the first pair of cities will complete the project than that the second pair will undertake the project.

112-A1-2. In an economy that produces only guns and butter, if the economy is currently producing only butter, then the opportunity cost of guns is zero.

112-A1-3. Suppose that Ontario can produce wheat at $1/bushel and corn at $3/bushel and Quebec can produce wheat at $4/bushel and corn at $4/bushel. Ontario has an absolute advantage in corn production, but Quebec has a comparative advantage in corn production.

112-A1-4. The data in 112A1-3 tells us that trading corn from Quebec to Ontario at a price of 2 bushels of corn per bushel of wheat will make both provinces better off.

112-A1-5. If the demand curve for a good is given by Qd=100-P and the supply curve for the good is given by Qs=-100+19P, the equilibrium in the market {P, Q} is {10, 90}

Answer 1

112-A1-1. The statement is Uncertain

Both the cities are likely to complete the project because the unrecoverable cost is sunk cost which is not considered in economic decisions. It depends, then on other factors if the cities are not able to invest further.

112-A1-2. The statememt is False.

If the economy produces only guns and butter, if the economy is currently producing only butter, then the opportunity cost of guns is not zero but it is the cost of not producing guns which could have produced. This cost is generally the number of guns not produced but could have been produced.

112-A1-3. The statement is False.

Ontario can produce wheat at $1/bushel and corn at $3/bushel. Hence the opportunity cost of 1 bushel of wheat is (1/3) bushels of corn. Similarly, when Quebec can produce wheat at $4/bushel and corn at $4/bushel, then the opportunity cost of 1 bushel of wheat is 1 bushels of corn. Hence Ontario has a both absolute advantage as well as comparative advantage in wheat production and not in corn production

112-A1-4. No data is provided.

112-A1-5. The statement is True.

We are given that demand equation is Qd=100-P and the supply equation is Qs=-100+19P. Then the equilibrium in the market is 100-P = -100+19P

200 = 20P

P* = 10 and Q* = 90.

Hence the equilibrium {P, Q} which is provided as {10, 90}, is correct.