YOUR NAME:_______________________________

YOUR TAs NAME:___________________________ YOUR DISCUSSION #_____________

THE GEORGE WASHINGTON UNIVERSITY

Department of Economics

Economics 1011 Prof. Steve Suranovic

Section 14 Fall 2019
Problem Set #2

Due in Blackboard by Thursday September 26th.

A. Problems

1. Suppose Reggie has the following unit-labor requirements producing corn and wheat: aLC =
200 hrs per ton, aLW = 100 hours per ton. Nigel has the following unit-labor requirements: aLC =
300 hrs per ton, aLW = 120 hours per ton.

a. What is Reggie’s productivity in wheat production? Include units.

b. Demonstrate that Reggie has the absolute advantage in wheat production using
productivity comparisons.

c. Demonstrate that Reggie has the absolute advantage in corn production using
unit labor requirement comparisons.

d. What is the opportunity cost of corn production for Reggie?

e. What is the opportunity cost of wheat for Nigel?

f. Use the opportunity cost method to determine who has the comparative
advantage in corn.

g. Use the relative productivity method to determine who has the comparative
advantage in wheat.
2. Based on the Edgeworth box diagram for companies, Gallo and Kraft, each working for
one month, answer these questions

800 200 100 OG

600
A B
Wine (gals)

Gallo’s PPF

Kraft’s PPF
E
C
300
D F

OK 600 G600
1000
Cheese (lbs)
0

Kraft Gallo

A. Productivity of cheese
production (include units)

B. Productivity of wine
production (include units)

C. Opportunity cost of cheese

production (include units)

D. Absolute Advantage in
cheese production (check
one box)

E. Absolute Advantage in
wine production (check one
box)

F. Comparative Advantage in
 cheese production (check
one box)
G. Comparative Advantage
in wine production (check
one box)

H. If Kraft produces at point D and Gallo

at point F before specialization and trade
occur, what is the amount of wine and
cheese they will produce in total
together?

I. If Kraft and Gallo each specialize in

their comparative advantage good, what
is the total amount of wine and cheese
they will both produce?

J. At which labeled point in the diagram

would Gallo and Kraft most likely reach
if they specialized in their comparative
advantage goods and traded to their
mutual advantage?

K. What plausible market terms of trade (in

gals/lb) could prevail to induce Kraft to
increase its profit by specializing in cheese
production?
3. Consider the Edgeworth box diagram with Bo and Jo working for one day and each
specializing in production of either cheese (Qc) or wine (Qw). Use the diagram to answer
the following questions.

A OJo
120

Wine (gals)
Jo’s PPF
B 30
Bo’s PPF

60
C D

90

E
OBo 30 90 120
Cheese (lbs)

What is (are) …. Bo Jo

A. …. their wine productivities?

B …. their cheese productivities?

C. … the equation of their PPF?

D. … the opportunity cost of cheese

production? (include units)

E. What is the good in which each

person specializes?

F. What is the quantity of cheese

produced with specialization (include
units)
G. .. the quantity of wine produced with
specialization? (include units)

H. Who has the absolute advantage in

cheese production? (check one box)

F. Who has the comparative Advantage

in cheese production? (check one box)

G. … the quantity of cheese consumed

at the only labeled point that could
possibly be mutually advantageous?

H. …. the terms of trade at the only

labeled point that could possibly be
mutually advantageous?
4. Use Figure 1.8 in Lecture 6-7 to answer the following questions.

a. What is Olga’s unit-labor requirement in apple production?

b. What is Maria’s labor productivity in orange production?

c. How much more productive is Olga in orange production than Irina?

d. What is Maria’s apple productivity relative to Irina’s?

e. What is Irina’s opportunity cost of apple production?

 5. Suppose there are two sisters, Irina and Maria who can each produce apples and oranges
with different hourly productivities. The diagram below depicts two situations; one in
which Maria has a lower orange productivity and one with a higher productivity.

50

A
Apples (#)

40

30
Maria C
B
20

10

D Irina E Irina F
0
0 10 20 30 40 50
Oranges (#)

A. What is Maria’s lower orange productivity? Include units.

B. What is Maria’s higher orange productivity? Include units.

C. Indicate the joint PPF when Maria’s orange productivity is

low. (eg. ABCF)

D. Indicate the joint PPF when Maria’s orange productivity is

high. (eg. ABCF)

E. How many apples and oranges would the sisters consume

if they produce their comparative advantage goods when
Maria’s productivity is lower?

F. An increase in productivity should enable the sisters to

consume more apples AND more oranges afterwards
compared to the outcome in part C. On the joint PPF with the
higher productivity for Maria, draw and label a point G that
satisfies this result.
6. Use the demand curve diagram below to answer the following questions.
P ($/lb)
30

20

10

200 400 Q (lbs)

a. Calculate the price elasticity of demand for the quantity 200 lbs. Is it elastic, inelastic, or
other?

b. Calculate the total sales revenue if demand is satisfied at the price of $20. On the
diagram show what area corresponds to total sales revenue.

P ($/lb)
30

20

10

200 400 Q (lbs)

c. Calculate the market value of consumer surplus when 200 pounds are sold. On the
diagram show what area corresponds to consumer surplus.

P ($/lb)
30

20

10

200 400 Q (lbs)

d. If the price falls from $20 to $15 dollars what happens to total sales revenue if demand is
met? Explain why.

e. Calculate the price elasticity of demand for the quantity 400 lbs.

f. Calculate the total sales revenue if demand is satisfied at the price of $10. On the diagram
show what area corresponds to total sales revenue.

P ($/lb)
30

20

10

200 400 Q (lbs)

g. Calculate the market value of consumer surplus when 400 pounds are sold. On the
diagram show what area corresponds to consumer surplus.

P ($/lb)
30

20

10

200 400 Q (lbs)

h. If the price falls from $20 to $10 dollars what is the change in consumer surplus? On the
diagram show what area corresponds to the change in consumer surplus.

P ($/lb)
30

20

10

200 400 Q (lbs)

B. Short Essay Questions

One of the skills I want students to learn is how to describe economic principles in a simple way
without using graphs, or variables, or equations. Often a brief description of a principle will
involve relating the results of a model using words; that is, using the models as a guide for what
to say. I will give you several exercises like this on the homeworks and you can expect to see
several questions of this type on the exams in the future.

1. Briefly explain what motivates Smith and Jones and how it leads them to specialize in the
good in which they have a comparative advantage

2. Briefly describe the four primary changes that can cause economic growth in an economy.

3. Suppose you are watching the evening news with a close friend who knows that you are taking
an economics course. Your friend has never taken economics and asks you for an explanation of
the following italicized terms. Note that your friend is very impatient and is only satisfied with a
very concise explanation.

A. An economist being interviewed notes that the demand for gasoline is very inelastic.

B. A spokesperson for a discount clothing chain expresses worry about rising household income
because many of his products are inferior goods.
C. Jeopardy Style Short Answer Questions
Questions Answers
1. In the exchange model with production, the
utility of both traders rises because of trade. Is
Implication
this an assumption or an implication of the
model?

2. In the exchange model with production, each

person specializes in his comparative advantage
Implication
good. Is this an assumption or an implication of
the model?

3. In the exchange model with production, the

only goods produced are apples and oranges. Is
this assumption more likely to be consequential Inconsequential
to the result of mutual gains from trade or
inconsequential?

4. In the exchange model with production, the

traders are assumed to have perfect information
about their production possibilities. Is this
Consequential
assumption more likely to be consequential to the
result or mutual gains from trade or
inconsequential?

5. The exchange model with production assumes

that trade occurs bilaterally, that is, between two
individuals. Is this assumption included more Reflects reality
because it reflects reality or more because it
simplifies the model?

6. The exchange model with production assumes

that the individuals have different productive
capabilities. Is this assumption included more Reflects reality
because it reflects reality or more because it
simplifies the model?
7. If Maria’s unit-labor requirement is 4 hours per
pound of cheese and 8 hours per gallon of wine,
while Vincent’s unit-labor requirement is 8 hours Maria b/c her unit-labor requirement is lower
per pound of cheese and 6 hours per gallon of (4 < 8 hrs/lb)
wine, who has the absolute advantage in cheese?
Why?

8. If Maria’s unit-labor requirement is 4 hours per

pound of cheese and 8 hours per gallon of wine,
while Vincent’s unit-labor requirement is 8 hours Vincent b/c his unit-labor requirement is lower
per pound of cheese and 6 hours per gallon of (6 < 8 hrs/gal)
wine, who has the absolute advantage in wine?
Why?

9. If Maria’s unit-labor requirement is 4 hours per

pound of cheese and 8 hours per gallon of wine,
while Vincent’s unit-labor requirement is 8 hours Maria b/c her opportunity cost of cheese is
per pound of cheese and 6 hours per gallon of lower (4/8 = ½ < 8/6 = 4/3 gal/lb)
wine, who has the comparative advantage in
cheese? Why?

10. If Maria’s unit-labor requirement is 4 hours

per pound of cheese and 8 hours per gallon of
wine, while Vincent’s unit-labor requirement is 8 Vincent b/c his opportunity cost of wine is lower
hours per pound of cheese and 6 hours per gallon (6/8 = ¾ < 8/4 = 2 gal/lb)
of wine, who has the comparative advantage in
wine? Why?

11. If Charlie’s productivity is 4 pounds of cheese

per hour and 8 gallons of wine per hour, while
Neither, b/c their productivities are the same
Mario’s productivity is 4 pounds of cheese per
(4 = 4 lbs/hr)
hour and 12 gallons of wine per hour, who has
the absolute advantage in cheese? Why?

12. If Charlie’s productivity is 4 pounds of cheese

per hour and 8 gallons of wine per hour, while
Charlie because his opportunity cost of cheese is
Mario’s productivity is 4 pounds of cheese per
lower (8/4 = 2 < 12/4 =3)
hour and 12 gallons of wine per hour, who has
the comparative advantage in cheese? Why?
13. Always, Never or Sometimes, if a person has
an absolute advantage in a good will she have a Sometimes
comparative advantage in that same good?

14. Yes or No, is it possible that one person does

NOT have a comparative advantage in any good Yes
in a two good economy?

15. Always, Never or Sometimes, in a two good,

two person economy, if one person has a
comparative advantage in a good, will the other Always
person have a comparative advantage in the other
good?

16. Suppose a person’s opportunity cost of cheese

More cheese b/c she only needs to give up 1 gal
production is 1 gal of wine. If the terms of trade
of wine during production to get 2 gals of wine
in the market is 2 gal per lb of cheese, should this
through trade
person produce more or less cheese? Explain.

17. If it takes a silversmith (1/6) hour of work to

produce a silver fork, what is the worker’s 6 forks per hour
productivity? (include units)

18. If a worker’s unit-labor requirement is 2

hours per pound of cheese and 4 hours per gallon
of wine, how much wine and cheese can he 10 lbs of cheese and 5 gals of wine
produce if he splits his 40-hour work week
equally between the two products? (include units)
19. If Tom’s productivity is 20 spoons per day or
60 knives per day and Fred’s productivity is 30 Fred b/c his opportunity cost of spoons is lower
spoons per day or 60 knives per day, who has the (2 knives/spoon < 3 knives/spoon)
comparative advantage in spoons? Why?

20. Name given to a second good that a consumer

might buy when the first good is not available or Substitute
is too expensive

21. Name given to a second good that a consumer

Complement
might use at the same time as the first good.

22. Name two substitute goods or services for a

Book, newspaper
magazine

23. Name two complement goods for a magazine Coffee, tea

24. Of increase, decrease or stay the same, this

would happen to demand for shrimp today if the Decrease
price of shrimp rises.

25. Of increase, decrease or stay the same, this

would happen to demand for shrimp today if the Stay the same
wages of shrimp workers rise.
26. Of increase, decrease or stay the same, this
would happen to demand for gasoline today if
Increase
consumers suddenly expect the price to increase
substantially next week.
27. Of increase, decrease or stay the same, this
would happen to demand for big screen TVs
Decrease
today if consumers expect a recession to begin
soon.
28. Latin phrase used to indicate that all other
variables in the model are assumed to remain at Ceteris paribus
their original values.
29. The demand curve for tea normally plots the
quantity demanded at every price of coffee, price Price of tea
of tea, price of milk, or income level?

30. Of shift the curve or move along the curve,

this would occur to the demand curve for peanuts Shift the curve
if the price of popcorn increases

31. Of shift the curve or move along the curve,

this would occur to the demand curve for Move along the curve
popcorn if the price of popcorn increases

32. Name of the elasticity measure indicating the

responsiveness of demand for a product to its Price elasticity of demand
own price changes

33. Name of the elasticity measure indicating the

responsiveness of demand to another good’s price Cross price elasticity of demand
change

34. Name of the elasticity measure indicating the

responsiveness of demand to a change in Income elasticity of demand
household income

35. Term used to describe the type of good that

has a negative cross price elasticity of demand Complement
with another good, like water.

36. Term used to describe the type of good that

has a negative income elasticity of demand with Inferior
another good, like water.

37. The percentage change in the demand for

Gatorade if the price elasticity of Gatorade
+5%
demand is 0.5 and the price of Gatorade falls by
10%.
38. Of positive, negative or zero, the value of the
Positive
marginal revenue when demand is elastic.

39. Of increase, decrease or stay the same, the

effect of an increase in price on total revenue in Decrease
an industry if the price elasticity of demand is 1.5

40. Of increase, decrease or stay the same, the

effect of an increase in price on total revenue in Decrease
an industry if the price elasticity of demand is 1.5