Answer all questions.Show all calculations.Provide economic reasoning. Draw graphs whenever necessary. Do not useExcel for calculations.

1. Use the data below to answer the following questions.

Labor hours needed to make 1 unit of

Beer

T-shirts

Mexico

20

30

Canada

24

48

(a) Calculate the opportunity cost of producing 1 (bottle of) beer in Mexico.

(b) Calculate the opportunity cost of producing 1 (bottle of) beer in Canada.

(c)Calculate the opportunity cost of producing 1 t-shirt in Mexico.

(d) Calculate the opportunity cost of producing 1t-shirt in Canada.

(e) Determine which country has absolute advantage in beer and which country has absolute advantage in t-shirt production. Explain.

(f) Determine which country has comparative advantage in beer and which country has comparative advantage in t-shirt production. Explain.

(g) How should each country engage in trade with the other? Explain.

(14)

2. The demand and supply equations for a product are given by the following equations:

Demand:Q_D = 50 -4P

Supply:Q_S= -10 +2P

Calculate the equilibrium price and quantity.

Determine the quantity that will be bought and sold in the market if the Government imposes a price ceiling of $8? What if the ceiling is set at $11?

(16)

3.For a product, at a price of $3, quantity demanded is 60 units and at a price of $5 quantity demanded is 40 units.Using the midpoint formula, calculate the value of price elasticity of demand.

(12)

4A. W. Phillips Company manufactures a variety of residential hardwood cleaner for $5 a bottle. Sales have averaged 100 (thousand) bottles per month during the last year. Recently A.W. Phillips's closest competitor, P.T. Phelps Company cut its prices on similar cleaner from $6 to $4. As a result A.W. Phillips's sales declined to 60 (thousand) bottles per month.

(a) Using a mid- point formula calculate the cross price elasticity of demand between the two varieties of cleaners.

(b) If A.W. Phillips knows its ownprice elasticity of demand for its cleaner to be -1.43,what price would they have to charge in order to restore their monthly sales back to 100 (thousand) bottles? (Assume that P.T. Phelps maintains its price at $4.)

(Note: in (b) you have to use the elasticity as a negative number.)

Show and explain all calculations.

(20)

5.After several years of decline, the market for handmade acoustic guitars is making a comeback.These guitars are usually made in small workshops employing relatively few highly skilled luthiers.Assess the impact on the demand, supply, equilibrium price and quantity of handmade acoustic guitars as a result of each of the following events. In your answers indicate which curve(s) shift(s) and in which direction.

a.Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods.

b.A foreign producer reengineers the guitar making process and floods the market with identical guitars.

c.Music featuring handmade acoustic guitars makes a comeback as audiences tire of heavy metal and grunge music.

d.The country goes into a deep recession and the income of the average American falls sharply.

(32)

6.The following data are available for output (Q) and Long Run Total Cost (LTC) for a firm.Using appropriate calculations determine the range of outputs over which the firm's technology exhibits Increasing, Decreasing or Constant Returns to Scale.

Q

LTC

1

33

2

54

3

75

4

100

5

150

6

228

7

350

(26)

7. (i)A competitive firm's total cost function is given by

TC = .25Q² + 25

(with MC = .5Q).

The firm faces a market price of $15.Algebraically calculate the profit maximizing output and the level of optimal profit for the firm.

(ii)Suppose that fixed costs increase by $50 but the prevailing market price remains unchanged.Using algebra determine the effects of this change in cost on the profit maximizing output and the optimal profit.Do you see any change from your answer to (i) above?Explain why or why not.

(40)

8.A monopolist's demand function is given by

P = 80 - 3Q

(with MR = 80 - 6Q).

Its total cost function is

TC = 20Q + 200

(with MC = 20).

(i)Using algebra determine the profit maximizing output, price and optimal profit for the firm.

(ii)Suppose that instead of maximizing profit, the firm wants to maximize total revenue.Using algebra determine the optimal output, price, profit and revenue for the firm.