Macroo 1

1. What is the difference between efficiency and equity?

2. Joe and Betty both produce butter and cheese. The following table provides information about some of the combinations of butter and cheese Joe and Betty can produce from their given resources and technology. Assume that they each have the same amount of resources.

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Joe’s production Betty’s production
Butter Cheese Butter Cheese
100 0 120 0
80 30 90 40
60 60 60 80
40 90 30 120
20 120 0 160

a. Draw Joe’s and Betty’s PPFs

b. Which individual has the absolute advantage in the production of butter?

c. Which individual has the absolute advantage in the production of cheese?

d. What is the opportunity cost of producing one pound of butter for Joe?

e. What is the opportunity cost of producing one pound of butter for Betty?

f. What is the opportunity cost of producing one pound of cheese for Joe?

g. What is the opportunity cost of producing one pound of butter for Betty?

h. Who has the comparative advantage in the production of butter?

i. Who has the comparative advantage in the production of cheese?

3. Consider the following demand-supply equations

QD=200-2P (demand equation)

QS=2P (supply equation)

Where QD is quantity demanded, QS is quantity supplied and P is price

a. Find the predicted price and quantity in a market-equilibrium situation.

b. Why will Q=80 not be an efficient output?

4. A survey indicated that chocolate ice cream is America’s favorite ice-cream flavor. For each of the following, indicate the possible effects on demand and/or supply and equilibrium price and quantity of chocolate ice cream.

a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.

b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.

c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.

d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.

5. Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events.

a. The market for newspapers in your town.

Case 1: The salaries of journalists go up.

Case 2: There is a big news event in your town, which is reported in the newspapers.

b. The market for bagels.

Case 1: People realize how fattening bagels are.

Case 2: People have less time to make themselves a cooked breakfast.

6. Suppose that the supply and demand schedules for Maine lobsters in U.S. is as follows:

Price of lobster (per pound) Quantity of lobster supplied (pound) Quantity of lobster demanded (pound)
$25 800 200
20 700 400
15 600 600
10 500 800
5 400 1000

a. Draw the demand curve and the supply curve for Maine lobsters.

b. What is the equilibrium price and quantity of lobsters?

7. Use a diagram to illustrate how each of the following events affects the equilibrium price and quantity of pizza.

a. The price of mozzarella cheese rises.

b. The health hazards of hamburgers are widely publicized.

c. The price of tomato sauce falls.

d. The incomes of consumers rise and pizza is an inferior good.

e. Consumers expect the price of pizza to fall next week.

8. Consider the following demand-supply equations

QD=200-2P (demand equation)

QS=2P (supply equation)

Where QD is quantity demanded, QS is quantity supplied and P is price

a. Find the predicted price and quantity in a market-equilibrium situation.

b. Why will Q=80 not be an efficient output?