Question

1) An autarkic country has a production possibility curve with constant opportunity costs such that it can produce at most 210 units of silk, or at most 70 units of kerosene. Suppose this country is currently producing 56 units of kerosene and 42 units of silk, and decides instead to produce 69 units of silk; how much kerosene will it produce?___

2) Consider the production possibility curves for England and Portugal. Each country can produce cloth or wine. England can produce at most 10 units of cloth or at most 10 units of wine. Portugal can produce at most 4 units of cloth or 8 units of wine. Which country has a comparative advantage in the production of wine?

1. England
2. Portugal

3. The Excess Capacity theorem asserts that because a monopolistic competitor produces an output that is smaller than what it would to minimize costs of production, and therefore has

1. no right to export its good.
2. excess capacity.
3. a tendency to charge a price that is less than average total cost.
4. an incentive to lobby for lower import tariffs.

4. A monopolist that practices first degree price discrimination

1. charges the highest price each buyer is willing to pay.
2. charges one price for a certain quantity, and another price for a different quantity.
3. charges a different price depending on the type of buyer.
4. charges a random price for each buyer.

Answer 1

Question 1

A country can produce either 240 units of silk or 70 units of kerosene.

So, the cost of producing 1 unit of silk is (70/210) 1/3 units of kerosene.

Country wants to increase the production of silk by (69 - 42) 27 units.

So,

Reduction in production of kerosene = 27 * (1/3) = 9 units

Country has to reduce the production of kerosene by 9 units.

Thus,

It will produce (56 - 9) 47 units of kerosene.

Question 2

England can produce either 10 units of cloth or 10 units of wine.

The opportunity cost of producing 1 unit of wine is (10/10) 1 unit of cloth.

Portugal can produce either 4 units of cloth or 8 units of wine.

The opportunity cost of producing 1 unit of wine is (4/8) 0.5 units of cloth.

Portugal can produce cloth at lower opportunity cost relative to England.

So,

Portugal has a comparative advantage in the production of wine.

Hence, the correct answer is the option (B).

Question 3

The excess capacity theorem asserts that because monopolistic competition produces an output that is smaller than what it would to minimize costs of production, and therefore has excess capacity.

Hence, the correct answer is the option (B).

Question 4

First degree price discrimination implies a pricing system in which each buyer is charged a price equal to his or her maximum willingness to pay.

So, a monopolist that practices first degree price discrimination charges the highest price each buyer is willing to pay.

Hence, the correct answer is the option (A).