1. [5 participation points] Assume that electric vehicles (EV) and gasoline cars are substitutes. Now suppose there is a large increase in gasoline prices. What happen to the gasoline car market? What happens to the EV market? Draw a picture for each market and indicate what happens to prices and quantities after the increase in gasoline prices. 2. [5 participation points] List five other shocks - supply or demand shifts - that would lead to an increase in the market quantity of EVs relative to gasoline cars. 3. [5 participation points] Consider the market for EVs and gasoline cars again. Suppose the government wants to reduce greenhouse gas emissions and therefore begins subsidizing EVs. Consider two cases: One in which EV supply is relatively elastic and one in which it is relatively inelastic. Draw a picture of what happens to the EV market in both cases. In which case is the subsidy more effective? 4. [5 participation points] In class we learned that oil prices had been very stable and falling gradually until around the 1970s Arab countries decided to use oil supply as a geopolitical power tool. One can consider this policy as a quantitative restriction or production quota. Draw a picture of what happens to the market for oil if suppliers restrict their production below the market equilibrium. What happens to prices? What happens to producer and consumer surpluses, what about total surplus? 5. [5 participation points] The Federal Reserve Economic Data (FRED) database is available at https://fred.stlouisfed.org. Go to FRED and search for data on crude oil prices. You will find several series; click on one of them, such as Crude Oil Prices: West Texas Intermediate (WTI)Cushing, Oklahoma. Adjust the dates to focus in on the time period from January 1, 2019, through April 15, 2020. The short recession induced by COVID-19 is shown by the shaded area. Download the graph and copy-paste it to your solution key. What happened to crude oil prices during the recession, especially as the recession continued? Do you think the change in price was driven more by a shift to demand or to supply? Draw a picture that captures the market for crude oil prices and illustrate what happened to the market at the onset of the COVID-19 pandemic. Suppose Home and Foreign both only produce bikes and ropes for climbing. Precisely their production possibilities are characterized by the following table (which assumes that both countries use all of their 4 workers in the two production processes): Workers Workers Home: Bikes Ropes Bikes 0 4 0 1 3 16 2 2 28 3 1 36 4 0 40 Home: Foreign: Foreign: Ropes Bikes Ropes 80 0 40 60 20 36 40 40 28 20 60 16 0 80 0 1. [b participation points] Calculate Home's marginal return from allocating one more worker to bike production at each level. Do the same for allocating one more worker to rope production. Are the marginal returns decreasing, constant or increasing as more workers are assigned to their production? 2. [5 participation points] Calculate Home's marginal costs (opportunity cost) of allocating one more worker to rope and bike production at each worker allocation. Are the marginal costs decreasing, constant or increasing as more workers are assigned to their production? Why would that occur? 3. [6 participation points] Draw the PPF of Home and Foreign in separate graphs. Indicate which points are technically efficient. Are there decreasing, constant or increasing returns? 4. [5 participation points] Note that Foreign's PPF is the inverse of of Home's. Thus, their marginal costs of producing ropes and bikes are the inverse of Home's. Suppose the two country's open up to trade with each other. In which product should each country specialize in and why? What is total world production? 5. [6 participation points] Now suppose that both country's preferred allocation is to consume equal amounts of bikes and ropes. Under the trade with full specialization, how many bikes and ropes can each country consume? 6. [ participation points] If the two countries weren't able to trade, what would their preferred (technically efficient) allocation be? Which regime do you think they prefer, trade or no trade