General Business 765, Lecture 3

Spring 2001

Answers to Homework #2

1. a. O.C. of one unit of sugar is one third unit of wheat.

b. O.C. of one unit of wheat is three units of sugar.

c. O.C. of one unit of sugar is ¾ units of wheat.

d. O.C. of one unit of wheat is 4/3 units of sugar.

e. Economy X

f. Neither: Economy X and Economy Y can both produce 24 units of wheat per day.

g. Economy X

h. Economy Y

i. Suppose they initially produce

ECONOMY	SUGAR	WHEAT
Economy X	36 units per day	12 units per day
Economy Y	16 units per day	12 units per day
TOTAL PRODUCTION	52 units per day	24 units per day

With specialization according to comparative advantage they could increase production. For example,

ECONOMY	SUGAR	WHEAT
Economy X	54 units per day	6 units per day
Economy Y	8 units per day	18 units per day
TOTAL PRODUCTION	62 units per day	24 units per day

2. a. Q = 24

b. P = $52/unit

c. CS = $576

d. PS = $576

e. Consumer Expenditure = $1248

f. P = -60 + 2 Q

g. Price with the subsidy = $20/unit

h. $64/unit

i. $2560

j. If demanders are subsidized, they will pay price with the subsidy of $84/unit in order for consumption to equal 40 units. The cost of the subsidy to the government will still be $2560.

4. a. (E), (U) and/or (N); (F) if (U)

b. (D) and/or (N)

c. (N)

d. (U); (F)

e. (N)

f. (N)

g. (E) or (N) (depends on the age of teen)

h. (U); (ST)

i. (U); (C)

j. (U); (S)

k. (U); (F)