Elements of Macroeconomics: Homework #1

Name: ____________________
Sec on: ____________________
Due at 8:00 am on 9/13
[Part A] Short Ques ons (5 points)
Fill in the blanks
a. Economics is the study of the choices we must make as we confront scarcity, the mis-
match between limitless want and limited means.

b. Opportunity cost is the highest valued alterna ve that must be given up to engage in an
ac vity.

c. There are three types of unemployment: cyclical, fric onal, and structural.

d. The ability to produce more of a good than compe tors using the same inputs is called
having a/an absolute advantage.

e. The ability to produce a good or service at a lower opportunity cost than a compe tor is
called having a/an compara ve advantage.
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 [Part B] Compara ve Advantage vs. Absolute Advantage (35 points)
Consider the following two produc on possibility schedules.

Bagel Co ee (cups)
Charles Cafe 40 100
Starbucks 150 450

a. What is the opportunity cost of producing one bagel in Charles Cafe? (5 points)
100/40 = 2.5 cups of co ee per bagel

b. What is the opportunity cost of producing one cup of co ee in Charles Cafe? (5 points)
40/100 = 0.4 bagels per cup of co ee

c. What is the opportunity cost of producing one bagel in Starbucks? (5 points)

450/150 = 3 cups of co ee per bagel

d. What is the opportunity cost of producing one cup of co ee in Starbucks? (5 points)

150/450 = 0.33 bagels per cup of co ee

e. Which cafe has the compara ve advantage in the produc on of co ee? (3 points)
Starbucks has the compara ve advantage in producing co ee as it has lower opportunity cost
of producing co ee

f. Which cafe has an absolute advantage in the produc on of bagels? (3 points)

Starbucks has the absolute advantage in producing bagels as it produces more bagels than
Charles Cafe.
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 g. Draw produc on possibility fron ers, assuming a linear trade between bagels and co ee
for both cafes. Then draw the combined produc on possibility fron er. (9 points)
Le : Charles Cafe
Right Starbucks
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 [Part C] Supply and Demand Analysis (20 points)
The table below gives data on the seafood market at the end of 2029, in Crystal City.

Price (per pound) Quan ty

Prawns $4 9 thousand
Crabs $8 14 thousand

a. Label the graphs below so that we are in equilibrium. (One graph is for prawns and the
other is for crabs) (5 points)

Prawn
Price

Demand Supply

Quan ty

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 Crabs
Demand

Supply
Price

Quan ty

Now answer the ques ons assuming the following has happened.

Usually, in crab seasons every year, temporary workers from a neighbor country move to Chesa-
peake Bay to help harvest the crabs. But due to a ghtening of the temporal worker visa poli-
cies, fewer crab pickers could come in year 2030. Therefore, the cost of producing crabs in-
creases. Suppose also that the market achieves a new equilibrium in the same year. The new
equilibrium price per pound, in the market for crabs moves to $12.
b. Did the supply curve or the demand curve shi for crabs? If so, which one? (3 points)
Yes. The supply curve.
c. Did we move along the supply curve or the demand curve for crabs? If so, which one? (3
points)
Move along the supply curve

d. Draw the shi in a graph below, so that it correctly represents the new equilibrium. (3
points)

See the orange line.





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 e. What is the new equilibrium quan ty of crabs (approximately)? (3 points)

11.5 thousand

f. Should we expect this to a ect the market for prawns? If so, is it because they are sub-
s tutes or complements? (3 points)

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[Part D] Supply and Demand Quan ta ve Analysis (20 points)

Consider the market for electronic scooters.
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 In this market, the supply curve is given by Qs = 20Ps - 5Pe and the demand curve is given by
Qd = 100 - 25Ps + 10Pg, where :s” denotes electric Scooters, :e” denotes electricity prices,
and :g” denotes gasoline prices.

a. Assume that Pe and Pg are xed at Pe = 4 and Pg = 2. Calculate the equilibrium price
and quan ty in the electric Scooters market. (10 points)
Let Qs = Qd, then 20Ps-5*4 = 100-25Ps+10*2, P*s = 140/45 = 3.11, Q*s = 20*3.11-20= 42.22

b. Suppose that the price of electricity and gasoline changes to Pe = 3 and Pg = 5 and stays
xed at that level permanently. Calculate the equilibrium price and quan ty in the elec-
tric Scooters market. (10 points)
Let Qs = Qd, then 20Ps-5*3 = 100-25Ps+10*5, P*s = 165/45 =3.67, Q*s = 20*3.67-15= 58.33
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