1. Tutorial Week 12

2. Question 1
Calculate the opportunity cost of producing 1 additional pen between points A and B.
Calculate the opportunity cost of producing 1 additional pencil between points A and B.
Calculate the opportunity cost of producing 1 additional pen between points B and C. What conclusions can you come to about this opportunity cost compared to the calculation you made above?
Calculate the opportunity cost of producing 1 additional pencil between points B and C. What conclusions can you come to about this opportunity cost compared to the calculation you made above?

3. Calculate the opportunity cost of producing 1 additional pen between points A and B.
The opportunity cost of pens between A and B is one pen for two pencils (=(10-0)/(10-5) = 2).

4. Calculate the opportunity cost of producing 1 additional pencil between points A and B.
The opportunity cost of pencils between A and B is one pencil for half a pen (=(10-5)/(10-0) = ½).

5. Calculate the opportunity cost of producing 1 additional pen between points B and C. What conclusions can you come to about this opportunity cost compared to the calculation you made above?
The opportunity cost of pens between B and C is one pen for five pencils (=(25-10)/(5-2)) = 5).
This is a much higher opportunity cost than between A and B (2).

6. Calculate the opportunity cost of producing 1 additional pencil between points B and C. What conclusions can you come to about this opportunity cost compared to the calculation you made above?
The opportunity cost of pencils between B and C is one pencil for 1/5 of a pen (=(5-2)/(25-10) = 1/5).
This is a much lower opportunity cost than between A and B (1/2).

7. Question 2
Swedish and Danish workers can each produce 4 cars a year. A Swedish worker can produce 10 tonnes of grain a year, whereas a Danish worker can produce 5 tonnes of grain a year. Assume that each country has 100 million workers.
Construct a table showing the production opportunities of both countries.
Graph the production possibilities frontier of the Swedish and Danish economies.
For Sweden, what is the opportunity cost of a car? Of grain? For Denmark, what is the opportunity cost of a car? Of grain? Put this information in a table.
Which country has an absolute advantage in producing cars? In producing grain?
Which country has a comparative advantage in producing cars? In producing grain?

8. Swedish and Danish workers can each produce 4 cars a year
Swedish and Danish workers can each produce 4 cars a year. A Swedish worker can produce 10 tonnes of grain a year, whereas a Danish worker can produce 5 tonnes of grain a year. Assume that each country has 100 million workers.
For Sweden, what is the opportunity cost of a car? Of grain? For Denmark, what is the opportunity cost of a car? Of grain? Put this information in a table.

9. Swedish and Danish workers can each produce 4 cars a year
Swedish and Danish workers can each produce 4 cars a year. A Swedish worker can produce 10 tonnes of grain a year, whereas a Danish worker can produce 5 tonnes of grain a year. Assume that each country has 100 million workers.
f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?

10. + 50m produce cars  50*4 = 200m cars
Swedish and Danish workers can each produce 4 cars a year. A Swedish worker can produce 10 tonnes of grain a year, whereas a Danish worker can produce 5 tonnes of grain a year. Assume that each country has 100 million workers.
WITHOUT TRADE
Sweden:
+ 50m produce cars  50*4 = 200m cars
+ 50m produce grain  50*10=500 tones of grain
Denmark
+ 50m produce grain  50*5=250 tones of grain

11. Sweden: 50m (cars) and 50m (grain) Denmark: 50m (cars) and 50m (grain)
g. Starting from a position without trade, give an example in which trade makes each country better off.
Sweden: 50m (cars) and 50m (grain)
Denmark: 50m (cars) and 50m (grain)
Sweden: Move 1 worker from car production to grain production. How does the quantity of each change?
Denmark: Move 1 worker from grain production to car production. How does the quantity of each change?

12. Sweden: Move 1 worker from car production to grain production.
+ 4 fewer cars
+ 10 additional tones of grain
Denmark: Move 1 worker from grain production to car production.
+ 4 more cars
+ 5 fewer tones of grain
Suppose Sweden offers to trade 7 tonnes of grain to Denmark for 4 cars.
Does Sweden benefit?
Does Demark benefit?

13. Question 3
Morgan and Oliver share a flat. Their favourite activities are cooking pizza and making homebrew beer. Oliver takes 4 hours to produce 1 barrel of beer, and 2 hours to make a pizza. Morgan takes 6 hours to produce 1 barrel of beer, and 4 hours to make a pizza.
a) What is each flatmate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
b) If Oliver and Morgan trade foods with each other, who will trade away pizza in exchange for beer?
c) The price of pizza can be expressed in terms of barrels of beer. What is the highest price at which pizza can be traded that would make both flatmates better off? What is the lowest price? Explain.

14. Morgan and Oliver share a flat
Morgan and Oliver share a flat. Their favourite activities are cooking pizza and making homebrew beer. Oliver takes 4 hours to produce 1 barrel of beer, and 2 hours to make a pizza. Morgan takes 6 hours to produce 1 barrel of beer, and 4 hours to make a pizza.
a) What is each flatmate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
Oliver:
+ 4 hours  1 barrel of beer
+ 2 hours  1 pizza
1 pizza = 2 hours = ½ * 4 hours = ½ barrel of beer
Morgan
+ 6 hours  1 barrel of beer
+ 4 hours  1 pizza
1 pizza = 4 hours = 4/6* 6 hours = 4/6 * barrel of beer = 2/3 barrel of beer
Oliver has absolute advantage in making Pizza
Oliver has comparative advantage in making Pizza

15. b) If Oliver and Morgan trade foods with each other, who will trade away pizza in exchange for beer? Oliver has comparative advantage in making Pizza  Oliver will trade away pizza in exchange for beer.

16. + Can P be larger than 2/3 barrel of beer?
c) The price of pizza can be expressed in terms of barrels of beer. What is the highest price at which pizza can be traded that would make both flatmates better off? What is the lowest price? Explain.
Oliver:
1 pizza = ½ barrel of beer
Morgan
1 pizza = 2/3 barrel of beer
The price of pizza can be expressed in terms of barrels of beer. Let the price of pizza be P
+ Can P be larger than 2/3 barrel of beer?
+ Can P be smaller than ½ barrel of beer?

17. Question 4
Consider a small country that imports bananas at the price of £20 per bag. The demand curve is D = 500 – 5P. The supply curve is S = P.
a. Determine the no-trade equilibrium. What is consumer surplus and producer surplus?
b. Determine the free trade equilibrium. What is consumer surplus and producer surplus?
c. Suppose the country now imposes an import tariff of £10 per bag of bananas. Draw the diagram for this policy. Solve for equilibrium prices and quantities of the equilibrium with the tariff. Calculate the effects on consumer surplus, producer surplus, government revenue, and the net welfare effect of the tariff.
d. Suppose now that (without the tariff) the country imposes a quota that limits imports to 50 bags. Solve for equilibrium prices and quantities of the equilibrium with the quota. Calculate the effects on consumer surplus, producer surplus, and the quota rent.

18. Determine the no-trade equilibrium
Determine the no-trade equilibrium. What is consumer surplus and producer surplus?

19. For the no-trade equilibrium, set demand equal to supply:
Determine the no-trade equilibrium. What is consumer surplus and producer surplus?
For the no-trade equilibrium, set demand equal to supply:
500-5P=-50+5P
P=55; Q = 500-5*55 = 225

20. Consumer surplus:
Supplier surplus

21. Determine the free trade equilibrium
Determine the free trade equilibrium. What is consumer surplus and producer surplus?

22. Free trade: P= 20 D = 500-5*20 = 400 S= -50 + 5P = -50 + 100 =50
Determine the free trade equilibrium. What is consumer surplus and producer surplus?
Free trade: P= 20
D = 500-5*20 = 400
S= P = =50
Import = = 350

23. C) Suppose the country now imposes an import tariff of £10 per bag of bananas. Draw the diagram for this policy. Solve for equilibrium prices and quantities of the equilibrium with the tariff. Calculate the effects on consumer surplus, producer surplus, government revenue, and the net welfare effect of the tariff.

24. Suppose the country now imposes an import tariff of £10 per bag of bananas. Draw the diagram for this policy. Solve for equilibrium prices and quantities of the equilibrium with the tariff. Calculate the effects on consumer surplus, producer surplus, government revenue, and the net welfare effect of the tariff.
P= = 30
D = 500-5*30 = 350
S= *30 = =100
Import = = 250
Tax revenue = 10 * 250 = 2500

25. The net welfare effect of the tariff.
Free trade
CS 1=
SS 1 = 250
With Tax
CS 2 =
SS 2 = 1000
TR=Tax revenue = 2500
The net welfare effect of the tariff.
CS2 + SS2 + TR – CS1 – SS1 = - 500

26. S = -50 + 5P + 50 = 5P D= 500 – 5P S=D  5P = 500-5P  P= 50 D= 250;
D) Suppose now that (without the tariff) the country imposes a quota that limits imports to 50 bags. Solve for equilibrium prices and quantities of the equilibrium with the quota. Calculate the effects on consumer surplus, producer surplus, and the quota rent.
S = P + 50 = 5P
D= 500 – 5P
S=D  5P = 500-5P  P= 50
D= 250;
Import = 50
S_domestic = 250 – 50 =200

28. CS 3 = 6250
SS 3= 4000
Compare:
CS1 =
SS 1 = 250

29. Quota rent Quota rent = (P_domestic – P_foreign) * quota
= (50 – 20) * 50 = 1500