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ecomomics an overview

ecomomics an overview

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Published by Mosharraf Hussain

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Published by: Mosharraf Hussain on Apr 20, 2012
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Problem Set 6
Hard copies of your answers are due at the beginning of your section, either onThursday, November 3, or Friday, November 4. For example, if your sectionstarts at 10:00am on Friday, you should submit your answers to your TA in yoursection classroom at 10:00am on Friday, November 4. Late problems earn zeropoints.
: you can work on these problems or your own, or in a small group withother
Econ 1 students. If you choose to work in a group, each studentneeds to hand in a separate, individual copy to his/her TA.1. According to economists Becker and Grossman, each pack of cigarettessmoked creates about 68 cents of externalities borne by other members ofsociety. The externalities include the costs of cigarette smokers’ excess use ofhealth services, costs of fetal death, secondhand smoke, etc.a. Explain how a tax could be used to correct the externality. Show itgraphically.b. Mention another way that the government may try to use to correct theoverproduction of cigarettes due to the negative externality.2. Suppose that it costs $25,000 per day to build and maintain a bridgepotentially serving 20,000 people. 10,000 of these people are willing to pay $2per day to cross the bridge, while the other 10,000 value the bridge at $1 perday.a. Assuming that there is no congestion, is it efficient to build the bridge?b. Can you find a toll that will raise revenues sufficient to cover the costs ofbuilding and operating the bridge?c. Is the bridge a public good? What does your answer to parts (a) and (b)indicate about a possible role for government intervention?3. A dentist and a writer live next door to each other, and each has her officeat home. Screams of pain from the patients in the dentist’s office interferewith the writer’s creativity, causing her to write inferior novels and lose $800per year in income. The dentist would have to spend $600 to install sound-absorbing material on her office walls, and this material would have to bereplaced each year. The writer sues the dentist. The court can rule in favor ofthe author and require the dentist to soundproof her walls, or it can rule infavor of the dentist and dismiss the case. Explain what would happen undereach ruling if:a. The dentist and the writer are on speaking terms (small transaction costs,ignoring court fees).
b. They are not speaking to each other under any circumstances (largetransaction costs).Make sure that your answer for parts (a) and (b) contains some comparisonbetween the socially optimal outcome and the outcome actually achieved ineach circumstance.4. The Farm Bill passed in May 2002 promises billions of dollars in additionalsubsidies for agricultural producers, with support programs for wheat, corn,dairy, and peanut production among others. Use economic analysis to describeand explain the effects of these subsidies. Why do you think the Farm Bill waspassed?5. Cardassia and the Dominion produce only two goods: phasers andtransporters. Cardassia can produce either 200 phasers or 100 transporters inone day, while the Dominion can produce 500 phasers or 1000 transporters (allof them with constant opportunity costs).(a) What are the opportunity costs of producing phasers for Cardassia and theDominion?(b) If trade were to occur between Cardassia and the Dominion, who wouldspecialize in the production of phasers and who would produce starships.(c) What would be the range of prices that would allow trade to occur?(d) If Cardassia discovered a new technology that allowed it to produce 500transporters per day with its existing resources, how would your answers to (a),(b) and (c) change?6. The nation of Acirema is “small,” unable to affect world prices. The demandcurve is Q 
=400-10P. The supply curve is Q 
=100+5P.(a) Fill the following table. What is the equilibrium price and quantity ofpeanuts without trade with other nations? Explain verbally and graphically.Price Demand Supply051015203040(b) Suppose the world price of peanuts is $10 per bag. If trade with othernations is unrestricted, will Acirema import or export peanuts? How many bagsof peanuts will be imported or exported? Explain verbally and graphically.(c) If there is an import quota of 75 bags, what will be the resulting domesticprice and production? Explain verbally and graphically.
Extra practice problems (completely optional; no points awarded)
A. Many agricultural crops are harmed by beetles and other insects. Theseharmful insects are prey for the praying mantis, a large insect. The prayingmantis is not an endangered species, but several agricultural states still imposea fine on anyone caught killing a praying mantis. Is there a good economicreason for such a fine? Explain.B. Imagine that wine makers in the state of Washington petitioned the stategovernment to tax wines imported from California. They argue that this taxwould both raise tax revenue for the state government and raise employmentin the Washington state wine industry. Do you agree or disagree with thisclaim? Is it a good policy? Explain.C. Assume that American rice sells for $100 per bushel, Japanese rice sells for16,000 yen per bushel, and the nominal exchange rate is 80 yen per dollar.(a) Explain how you could make a profit from this situation. What would beyour profit per bushel of rice? If other people exploit the same opportunity,what would happen to the price of rice in Japan and the price of rice in theUnited States.(b) Suppose rice is the only commodity in the world. What would happen tothe real exchange rate between the United States and Japan? Explain.D. Capitol has 1200 workers, and it can produce two goods, apples andbananas. Three workers can produce a ton of apples, while just two arenecessary to produce one ton of bananas. Worthing has a labor force of 800workers. The production of apples and bananas require 5 and 1 workers,respectively.(a) Graph the production possibility frontiers for the two countries.(b) What are the opportunity costs of apples in terms of bananas in Capitol andWorthing?(c) In the absence of trade between Capitol and Worthing, what would theprices of apples in terms of bananas be in each country?(d) Describe the pattern of trade.(e) Show graphically that both Capitol and Worthing gain from trade.

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