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Problem 1

Suppose an economy produces only two goods- Magnets and Neckties. Both goods require both capital and labour to produce. Assume capital and labour cannot be substituted for one another in the production process. The economy has 600 units of capital and 800 units of labour available. It takes 4 units of labour and 2 units of capital to make each Magnet and 2 units of labour and 6 units of capital to make each Necktie

Go back to the specification in Question 1: Question 1 information above

Problem 3 need answer

now suppose that labour and capital are perfectly substitutable. Suppose that a Foreign country has identical unit-labour and unit-capital requirements to Home, but Foreign has more total labour and less total capital to work with.

a) Graph each country's PPF, on the same graph, with QM on the x-axis and QN on the y-axis

b) Graph the relative supply of each country, on the same graph, with the relative price of Magnets ( PM/PN ) on the y-axis, and the relative quantity of Magnets ( QM/QN ) on the x-axis If the two countries then open up to trade (with each other):

c) What happens to the relative price of Magnets in the Home country?

d) What is the pattern of trade (who exports what to whom)?

e) What might we expect to happen to the wage rate relative to the cost of capital ( w/r ) in the Home country after opening up to trade?

f) How does opening up to trade affect the incomes of labour- and capital-owners in the Home country?

problem 3 needs an answer, the problem 1 is just there for the information needed to solve problem 3.

Consider a game in which a coin will be flipped three times. For each heads you will be paid $100. Assume that the coin comes up heads with probability 2/3. a. Construct a table of the possibilities and probabilities in this game. Possibilities Probability Outcome 1 0 heads, 3 tails 2 1 heads, 2 tails 3 2 heads, 1 tails 4 3 heads, 0 tails Instructions: Enter your responses rounded to the nearest whole dollar. b. Compute the expected value of the game. The expected value of the game is $ c. How much would you be willing to pay to play this game? : a person who is risk-neutral will be willing to pay $ A person who is risk averse will want to pay less than $d. Consider the effect of a change in the game so that if tails comes up two times In a row, you get nothing. How would your answers to the first three parts of this question change? Possibilities Probability Outcome Payoff 1 3 tails, 0 heads 2 tails, heads, tails 3 tails, tails, heads 5 4 heads, tails, tails 5 5 2 heads, 1 tails 6 3 heads, 0 tails Expected value = $ A person who is risk-averse will want to pay less than $ ; a person who is risk-neutral will be willing to pay $Consider a second-hand car market. There are two types of cars, \"lemons\" and \"peaches\". A seller values a lemon at $100 and a peach at $200. A buyer values a lemon at $120 and a \"peac \" at $300. 1. What are the gains-totrade per car? If the probability of a car being a lemon is E, what are the expected gains~to-trade? 2. Suppose that the information is perfect and the the gainstotrade are split equally between the buyers and the sellers for each type of car. What are the prices and is the allocation paretoefcient? Suppose that all gains-of- trade are assigned to the buyers. What are the correSponding prices? 3. Suppose that the buyers cannot observe the quality of the car. (a) What is the expected value of a car for a buyer if i of the cars are lemons? What is the maximum price a buyer is willing to pay? (b) If i of the cars are lemons, does there exist a pooling equilibrium in which both types of cars are sold? What is the minimal fraction of lemons such that an equilibrium does not involve any peaches sold? (c) Suppose that the fraction of lemons in the market is higher than the threshold obtained in (b). What cars are traded in equilibrium? Is the outcome pareto-efcient? ((1) Suppose that the owners of peaches can offer a warranty on the car which the owners of lemons do not offer. What trade pattern emerges in equilibrium? 5. Minimum-wage laws and unemployment Consider the market for labor depicted by the demand and supply curves that follow. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Graph Input Tool ? 20.0 Market for Labor 17.5 Supply Wage 2.50 (Dollars per hour) 15.0 Labor Demanded 875 Labor Supplied 125 (Thousands of Thousands of 12.5 workers) workers) WAGE (Dollars per hour) 10.0 7.5 5.0 Demand 2.5 0 125 250 375 500 625 750 875 1000 LABOR (Thousands of workers) Complete the following table with the quantity of labor supplied and demanded if the wage is set at $7.50. Then indicate whether this wage will result in a shortage or a surplus. Hint: Be sure to pay attention to the units used on the graph and in the table. For example, type in 100 for 100,000 workers. Labor Demanded Labor Supplied Wage (Thousands of workers) (Thousands of workers) Shortage or Surplus? $7.50 Suppose a senator considers introducing a bill to legislate a minimum hourly wage of $7.50. Which of the following statements are true? Check all that apply. In the absence of price controls, a shortage puts upward pressure on wages until they rise to the equilibrium. In this labor market, a minimum wage of $7.50 is binding. Binding minimum wages cause frictional unemployment. If the minimum wage is set at $10.50, the market will not reach equilibrium