HOMEWORK #1 DUE DATE: WEDNESDAY, FEBRUARY 6, 2013 This homework assignment is required and will be graded. Only homework submitted at the start of class on the due date will be accepted. You must show all formulas that you use and how you use them. Work problems neatly and in a logical, organized manner. PROBLEM #1 A student spends the summer working as an intern at a financial services company, gaining valuable experience, and receives $2,000 in pay for the summer. The student could have worked for the family business and earned $2,500 for the summer, or at a popular restaurant and earned $4,000 for the summer. Between these two alternative summer jobs, the student considered working for the family business as their next-best alternative to the internship. Based on the information given, what is the opportunity cost of working at the internship? Briefly explain your answer. PROBLEM #2 For each statement below, determine whether it is a positive or normative statement. Briefly explain each answer. a. In 2012, the Chinese economy grew at a 7.8% rate. b. It is unreasonable that companies must pay an average of $15,000 per year to provide health insurance for an employee and their family. c. The inflation rate for the U.S. last year was 2.1%. d. A growth rate of 2.2% in the U.S. economy is too slow. PROBLEM #3 The table below provides information on the production possibilities of tanks and bridges for a society. Combination Tanks Bridges A 300 0 B 280 1 C 240 2 D 180 3 E 100 4 F 0 5 PROBLEM #3 (CONTINUED) a. Using the data given in the table, find the opportunity cost (in tanks foregone) of producing the first, second, third, fourth, and fifth bridges. b. Plot the production possibilities data, with tanks on the vertical axis and bridges on the horizontal axis. Sketch the production possibilities frontier. c. Briefly explain how the shape of the curve in part b captures the law of increasing opportunity costs. d. The society develops a new production method that improves the efficiency of both bridge building and tank production. On your graph in part b, show how this new technology will change the production possibilities frontier. PROBLEM #4 Cameron and Drew are neighbors and are both skilled in carpentry. If Cameron spends a full day on painting, he can paint 6 rooms. Alternatively, if he spends a full day on installing windows, he can install 3 windows. If Drew spends a full day on painting, she can paint 16 rooms. Alternatively, spending the whole day on installing windows will yield 4 installed windows. a. Identify who has the absolute advantage in painting rooms? Who has the absolute advantage in installing windows? Briefly explain how you derived your answer. b. Identify who has the comparative advantage in painting rooms? Who has the comparative advantage in installing windows? Briefly explain how you derived your answer. c. In which activity should each person specialize in order to gain from trading? d. Suppose that Drew and Cameron specialize, according to part c, and agree to a term of trade of 1 installed window for 3 rooms. Based on part c, Drew will be buying windows from Cameron. Briefly explain why this term of trade is better for her than installing windows herself. (The same can be demonstrated for Cameron regarding his own purchases of painted rooms under these terms, however, you are not required to demonstrate this for this problem.) PROBLEM #5 The information below represents the demand and supply schedules for a product: Demand Schedule Supply Schedule Price Quantity Demanded Price Quantity Supplied XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXXa. Using graph paper, plot the demand curve, with price on the vertical axis and quantity on the horizontal axis. Find the slope of the line you have drawn. (If you do not have access to graph paper, you can print graph paper from the following: http://www.printfreegraphpaper.com/ ; graph paper is required for this problem only.) b. On the same graph, plot the supply curve. c. If the price in this market were $160, explain why this would not be the market equilibrium price. d. Find the equilibrium price and equilibrium quantity exchanged for this market. PROLBEM #6 For parts a through d of this problem, determine whether supply or demand will change (only one will change in each case). Indicate whether the price and quantity will rise or fall in the indicated market as a result of each change presented. Illustrate each answer graphically. Briefly explain each answer. For part e, follow the separate instructions given. a. IKEA is a Swedish home furnishings retailer. An official Indian agency supports IKEA opening 25 stores in India. Demonstrate the impact of IKEA’s entry into the Indian home furnishings market. b. Suppose that recent protests by South African vineyard farm workers succeed in securing higher wages for workers. Determine the impact on the South African wine market. c. In 2006, Pennsylvania could legally open casinos, resulting in new casinos opening in the Philadelphia area. Casinos in Atlantic City, New Jersey were legal prior to this time. Philadelphia is about a one-hour drive from Atlantic City. Determine the impact of the expanded gambling opportunities for customers in Philadelphia on the market for casinos in Atlantic City. d. Recently, the prices of the Nook and the Kindle, both electronic readers, have fallen. Determine the impact on the market for e-books. e. For this part of the problem, consider two simultaneous changes affecting the market for orange juice. Suppose that an early freeze in the south this winter negatively impacted the crop yield of oranges. Suppose further that consumers recently learned that drinking more orange juice will improve health, even more so than previous studies have indicated. Indicate which of these changes will impact supply and which will impact demand in this market. In which direction will supply and demand change? Without any further information, are we able to predict the direction of change in equilibrium quantity exchanged? Without any further information, are we able to predict the direction of change in equilibrium price? Illustrate your answer graphically and briefly explain your answer.