Question 1

a) Assume that using the same amount of resources, Fred and Barney both can produce Pogo sticks and unicycles as shown in the following table per month:

	Fred	Barney
Pogo Sticks	24	28
Unicycles	8	14

i. Does either individual have an absolute advantage in producing pogo sticks and/or unicycles? explain.)

ii. Calculate the opportunity cost of producing a unicycle for each person.

iii. Calculate the opportunity cost of producing a pogo stick for each person.

iv. If each person specializes in the product in which he has a comparative advantage, who should produce pogo sticks and who should produce unicycles? explain why.

b) Suppose the price elasticity of demand for wine is -0.40 and that Australians purchase about 500 million liters of wine each year. If the tax on wine was increased enough to raise the price of wine by 50 per cent, what would be the effect on the quantity of wine demanded? Is raising the tax on wine a more effective way to reduce the consumption of wine? Briefly explain

Question 2

a) Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The figure below illustrates the situation in the toilet paper market: Cost or benefit per unit P2 P Po 0 Marginal social cost Marginal private cost Q Q2 Q3 Q4 Marginal benefit Quantity of pollution reduction