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Directions: You should legibly handwrite or type the answers to the following questions. These must be submitted in class (not via email). Be sure to show all of your work!!
Consider the tables below that show the production possibilities for two different countries, Portlandia and Narnia where each country has the same resources.
Portlandia’s PPF Narnia’s PPF
Beads Wardrobes Beads Wardrobes
300 0 800 0
225 1 600 5
150 2 400 10
75 3 200 15
0 4 0 20
1. Choose the terms of trade for 1 wardrobe that would allow both countries to benefit from trade.
2. Fill in the table below with the quantity of each good that each country would produce once it completely specializes in its comparative advantage good.
Portlandia’s specialization Narnia’s specialization
Beads Wardrobes Beads Wardrobes
3. Fill in the table below with the quantity of each good that each country will consume assuming that Narnia will trade one-fifth if its output after specialization and use your terms of trade from question 1.
Portlandia’s consumption Narnia’s consumption
Beads Wardrobes Beads Wardrobes
4. For each event below, provide what will happen in the supply and demand model and be specific. For example, “the supply curve increased” or “the demand curve decreased.”
a. The increase in the price of a good
b. The decrease in the price of a substitute good
c. The increase in the price of an input
d. An improvement in the technology used to produce the good
e. A decrease in the number of sellers
f. The decrease in the price of a complement
g. An increase in the number of sellers
h. A tax on sellers
i. A subsidy on buyers
5. For the market at the right,
(a) compute the consumer surplus,
(b) compute the producer surplus, and
(c) compute the total surplus
6. (a) Illustrate an effective price floor and the shortage or surplus it creates. You should specify if it is a shortage or surplus.
(b) On your graph from 9(a), illustrate the consumer and producer surplus after the price floor.
(c) Also on your graph, illustrate the deadweight loss.
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