Download Answer Key for Quiz 1

Answer Key for Quiz 1
1. Answer: A
First you need to figure out the opportunity cost of producing each good for both countries. See the chart
below.
OC of producing 1 more ton of rice
OC of producing 1 more ton of corn
Country X
1.5 tons of corn
2/3 ton of rice
Country Y
2/3 ton of corn
1.5 tons of rice
From the chart above, you can see that the opportunity cost of producing 1 more ton of rice for Y is
lower than that for X. So Y has comparative advantage in producing rice and should be the producer and
exporter of rice. Following the same argument, the opportunity cost of producing 1 more ton of corn for
X is lower than that for Y. So X has comparative advantage in producing corn and should be the
producer and exporter of corn.
2. Answer: D
When the price of aviation fuel increases, supply curve of airline tickets shift to the left since the price of
input increases. Therefore, the equilibrium price will increase the equilibrium quantity will decrease. See
the graph below.
P
S’
S
P**
P*
D
Q
Q**
Q*
3. Answer: B
For a normal good, income decreasing will shift the demand curve of that good to the left. Therefore, the
equilibrium price will decrease and equilibrium quantity will decrease too. See the graph on the next
page.
1
P
S
P*
P**
D
D’
Q
Q**
Q*
4. Answer: B
There are 5 demand shifters and 5 supply shifters. See the chart below.
Demand shifters
Supply shifters
1. Income
1. Price of input
2. Price of substitutes/complements
2. Technological change
3. Taste
3. Price of substitutes in production
4. Population
4. # of firms in the market
5. Expected future price(for buyers)
5. Expected future price(for sellers)
B will NOT shift the supply curve since it’s one of the demand shifters!!!!!
5. Answer: A
There are two markets: coffee market and cream market. When the price of herbicides used in the production of
coffee increases, supply curve of coffee will shift to the left because price of input increases. So, the price of
coffee will increase and the quantity of coffee will decrease. And we know that coffee and cream are
complements. When price of coffee increases, the demand curve of cream will shift to the left (price of
complement is one of five demand shifters). Therefore, the price of cream will decrease and the quantity of
cream will decrease.
P
S’
P
S
S
D
Coffee market
D’
Q
Cream market
2
D
Q
6. Answer: A
When buyers expect the future price of petroleum to decrease, it will shift the demand curve of
petroleum to the left. Therefore, the price will decrease and the quantity will decrease.
P
S
P*
P*
*
D
D
’
Q
7. Answer: B
Q*
Q*
A: increase in the price of flour
(input of producing wheat bread) will shift the supply curve of wheat
*
bread to the left. So the price will increase and quantity will decrease. Therefore, A is wrong.
B: decrease in the price of flour will shift the supply curve of wheat bread to the right. So the price will
decrease and quantity will increase. Therefore, B is right.
C: increase in the price of substitute will shift the demand curve to the right. So both price and quantity
will increase. Therefore, C is wrong.
D: increase in the price of complement will shift the demand curve to the left. So both price and
quantity will decrease. Therefore, D is wrong.
8. Answer: A
There are two markets: cotton market and wool market. When the hurricane destroys much of the cotton,
supply curve of cotton will shift to the left, leading price of cotton to increase and quantity of cotton to
decrease. And we know that cotton and wool are substitutes, which means that when price of cotton
increases, demand curve of wool will shift to the right. Therefore, the price of wool will increase the
quantity of wool will also increase.
P
S’
P
S
S
D’
D
Cotton market
D
Q
Wool market
3
Q
9. Answer: B
For 90% of students who miss this question, the reason is that you didn’t look at the question carefully.
I’m asking for the price first and then quantity. So it should be B not A.
10. Answer: D
The demand function is X=2-4Px+5I+3Py
A: When income increases, demand for X will increase since the coefficient before I is positive. This
tells us that X is a normal good. So A is wrong.
B: When Px increases, demand for X will decrease since the coefficient before Px is negative. This tells
us that the demand of X satisfies the law of demand. So B is wrong
C: When Py increases, demand for X will increase since the coefficient before Py is positive. This tells
us that X and Y are substitutes. (think about the example of coke and pepsi) So C is wrong and D is right.
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