Problem Set #2 should be uploaded as one document by 11:59pm, Saturday. Give yourself enough time to complete the work and upload. Computers and technology don't always work and it would be unfortunate for you to lose points (get a zero) due to technical error. As noted in the syllabus, it's your responsibility to make sure your work was uploaded, so check!! For problems with computations, show your work to receive full credit.

1. Clark Marketing Services has found, through market tests, that the demand for Sonya's Peanuts has a price elasticity of demand equal to 0.5 and an income elasticity of demand equal to 1.8. You, an economist employed by Sonya's Peanuts, have been asked by the executives of the company to explain what this means for its pricing policy and choice of sales outlets. Company executives have been (a) thinking of lowering the firm's prices and (b) concentrating on selling to discount stores. Explain your advice for (a) and (b) and include how the pricing will impact revenue in your answer.

2. Use the table below, showing the maximum quantities of two items that two countries could produce if they each specialized entirely in one good or the other, to answer the questions which follow.

	Country
Industry	Neigeland	Eauland
Snowboards	500	100
Sailboats	250	200

a) Which country has an absolute advantage in the production of snowboards? ____________

b) Which country has an absolute advantage in the production of sailboats? _______________

c) What is the opportunity cost of a snowboard in Neigeland? ______________ sailboats.

d) What is the opportunity cost of a snowboard in Eauland? ______________ sailboats.

e) Which country has the comparative advantage in producing snowboards? ______________

f) If a country offered Neigeland 1 sailboat for 1 snowboard, would they accept the trade? Yes / No (highlight)

3. For each of the taxes below, indicate whether you think the tax burden will be borne primarily by consumers or producers. Also, how successful do you think each tax will be in raising revenues?

a) A city tax on the use of paper bags in supermarkets. Consumers have the option of asking for plastic bags or bringing their own bags.

b) An increase in the national gasoline tax.