EC155a and EC155b – Spring 2014
Answers to Problem Set #2
1. [5 points] A Wall Street Journal article recently asked readers the following questions:
1. An accident has caused deadly fumes to enter the school ventilation system
where it will kill 5 children. You can stop it by throwing a switch, but doing so will
kill one child in another room. Do you throw the switch?
2. Say that a doctor can save five patients with an organ transplant that would end
the life of a patient who is sick but not yet dead. Does she do it?
3. What is the difference, if any, between the two situations described in a and b?
4. How important are opportunity costs in your consideration? What other criteria
might guide your decision­making?
A good answer [3­4 points] will point out that opportunity cost is certainly not the only
relevant criterion: others are inherent values about right and wrong as well as societal
norms. A really good answer [5 points] will cite and use material from the David Brooks
piece we read in the first week of class.
2. [5 points] Adam Smith, who wrote The Wealth of Nations, and who is seen as the
founder of modern economics, also wrote The Theory of Moral Sentiments. In it he
argued that society would be better of if people weren’t so selfish and were more
considerate of others. How does this view fit with the view of economic reasoning
presented in the Mankiw text? Do you agree with Smith on this point? Why or why not?
A good answer [3­4 points] will point out that self­interest does get society very far, citing
the material in Mankiw, perhaps including the Smith quotations that he highlights. A
really good answer [5 points] make use of Mankiw’s 10 principles and/or other relevant
material that shows the power of other human traits (e.g. empathy).
3. [5 points] Mankiw’s Principle #5 is that “Trade can make people better off.” Listen to
this recent report from NPR. In this, has trade made both countries – the USA and
China – better off? Why or why not?
A good answer [3­4 points] will point out that the relevant opportunity costs and the
comparative advantages of each country do suggest that there are gains from trade
here. A really good answer [5 points] will note that job considerations do matter, and that
there will certainly be losers with this kind of trade: this will lead many to conclude that
the gains from trade are not high enough.
4. [9 points – 1 point for each sub­question.] Suppose that you receive this labor
productivity data for airplane and bulldozer productivity from Brazil and Mexico
Bulldozers
Airplanes
Mexico
3 days per unit
12 days per unit
Brazil
2 days per unit
10 days per unit
Setting up the problem in terms of output (here done in terms of 60 days; can also be
done per day).
Bulldozers per 60 days
Airplanes per 60 days
Mexico
20
5
Brazil
30
6
In Mexico, price of bulldozers (in terms of airplanes) = 1/4
In Brazil, price of bulldozers (in terms of airplanes) =1/5
In Mexico, price of airplanes (in terms of bulldozers) = 4
In Brazil, price of airplanes (in terms of bulldozers) = 5
1. What is the opportunity cost to Mexico of producing a bulldozer?
1/4 airplane
2. What is the opportunity cost to Mexico of producing an airplane?
4 bulldozers
3. What is the opportunity cost to Brazil of producing a bulldozer?
1/5 airplane
4. What is the opportunity cost to Brazil of producing an airplane?
5 bulldozers
5. Which country has the absolute advantage in the production of bulldozers?
Brazil (30 > 20)
6. Which country has the absolute advantage in the production of airplanes?
Brazil (6 > 5)
7. Which country has the comparative advantage in the production of
bulldozers?
The country with the comparative advantage has the lower opportunity
cost (measured by the internal price, as noted above) Therefore Brazil has
the comparative advantage in bulldozers.
8. Which country has the comparative advantage in the production of
airplanes?
For similar reasons, Mexico has the comparative advantage in airplanes.
9. Which of the following trade offers would be acceptable to both Mexico and
Brazil, and why?
1. 1 airplane = 6 bulldozers
2. 1 bulldozer = 0.33 airplanes
3. 1 airplane = 4.5 bulldozers
The countries will only trade at a price that is between their internal prices.
So only the third one (where 5 > 4.5 > 4). At that price, Brazil will export
bulldozers and Mexico will export airplanes.
5. [4 points – 1 point for each sub­question.] State whether the following pairs of goods
are complements or substitutes. If you think a pair is ambiguous in this respect, explain
why.)
1. Tennis courts and squash courts
Could be either. Complements if interest in squash promotes interest in
tennis; substitutes if people tend play one or other but not both.
2. Squash racquets and squash balls
Complements
3. Ice cream and chocolate
Could be either. Depends if people like them together or consider them
alternative sources of sugar and sweetness!
4. Cloth diapers and paper diapers
Substitutes
6. [5 points] What will happen to the equilibrium price and quantity of potatoes if
population increases and a new, higher yielding variety of potato plant is developed?
Explain your answer and plot the relevant supply and demand curves.
We know that the equilibrium quantity will be higher, as both demand and supply shift
out [2 points]. We don’t know what will happen to price; that depends on the relative
sizes of the two shifts [2 points]. A good graph will show this [1 point].
7. [6 points – 2 points for each sub­question.] You're given the following demand and
supply tables
P
D1
D2
D3
$37
20
4
8
$47
15
2
7
$57
10
0
6
$67
5
0
5
P
S1
S2
S3
$37
0
4
14
$47
0
8
16
$57
10
12
18
$67
10
16
20
A. Draw the market demand and supply curves
A good graph will label all axes and points clearly of market demand and supply – that is
the sum of each of these three sets of curves, respectively.
B. What is the excess supply/demand at price $37? Price $67?
At a price of $37, D = 32 and S = 18, so excess demand = 14.
At a price of $67, D = 10 and S = 46, so excess supply = 36
C. Label the equilibrium price and quantity
The graph should clearly show (24, $47) as the equilibrium quantity and supply.
8. [5 points] Question 14 from Chapter 4.
Market research has revealed the following info re: market for chocolate bars: Qd =
1600­300P Qs = 1400 + 700P. Calculate equilibrium price and quantity.
Set Qd and Qs equal to each other to determine equilibrium price (P = 0.2). Plug price
into either Qd or Qs to get equilibrium quantity (Q = 1540).