Comparative and Absolute Advantage

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Problem #1

1. What is the economic problem? Give an example of the economic problem from your own life. Use the ideas of scarcity and trade-offs why the economic problem applies to your example.

2. Explain the difference between self-interest and selfishness.

3. What are some opportunity costs associated with your decision to attend school. Include both monetary and non-monetary costs.

3. What is meant by comparative advantage? What is meant by absolute advantage? Give an example of a task for which you have a comparative advantage over someone else. Give an example of a task for which you have an absolute advantage over someone else.

Problem #2

1. Determine which of the demand curve shifters (PYNTE) would apply to each situation. Explain whether the event will increase or decrease demand for movie tickets. Tell whether the demand curve shifts to the right or to the left.

  • a. A decrease in the incomes of consumers of movies.
    b. An increase in the price of Red Box movie rentals.
    c. An increase in the number of consumers in the market for movies.

2. Determine which of the supply curve shifters (SPENT) would apply to each situation. Explain whether the event will increase or decrease the supply of movies. Tell whether the supply curve shifts to the right or to the left.

  • a. The cost to produce movies increases.
    b. The number of studios that make movies decreases.
    c. Movie theaters expect the market price of tickets to decrease next month.

3. What would be the impact of a rental price ceiling set below the equilibrium rental price? What if the price ceiling was set above the equilibrium price?

4. What would be the impact of a price floor set below the equilibrium price for wheat? What if the price floor was set above the equilibrium price?

Problem # 3

1. Choose one of the goods listed in Section 5.1, exhibit 6 on page 161 of the text. Is short-run demand for this item elastic or inelastic? Explain. Is long-run demand for this item elastic or inelastic? Explain.

2. Using the same good chosen in question 1, explain how each of the Determinants of Price Elasticity of Demand would or would not affect your demand for the good or service. These determinants are covered on pages 159-160 of the text.

3. If the producers of the good chosen in question 1 were to decide to raise prices, how would their total revenue be affected? Would it increase or decrease? Explain.

4. Use several sentences to explain whether each of the following increases, decreases, or stays the same after a price ceiling:

  • a. Consumer surplus
    b. Producer surplus
    c. Total welfare

Problem # 4

1. Explain, in your own words, the characteristics of a perfectly competitive market. For each characteristic, give an example of a firm or industry that would exhibit that trait. Keep in mind that no one firm can hold every characteristic.

2. How does a firm determine which level of output to produce in order to maximize profit? What happens to profit if the firm produces greater than or less than the optimal level of output?

3. Explain, in your own words, the various barriers to entry that are experienced in a monopoly market. Use an example of each barrier in your explanation.

4. What is the difference between a monopolist’s demand curve and a perfectly competitive firm’s demand curve? Why are they different?

Problem # 5

1. Which components of GDP (C,I,G,X,M) would be affected by the following:

  • a. You buy a pizza.
    b. You buy a new house.
    c. Tennessee resurfaces Interstate 40.
    d. You buy a Lamborghini.
    e. You buy a new stove.

2. Describe the three complementary explanations for why the aggregate demand curve is negatively sloped.

3. Describe the two complementary explanations for why the aggregate supply curve is positively sloped.

4. Explain the two types of inflation and what causes each one.