QUESTIONS
1. Construct your own table of numbers that can be used to show how two countries can benefit from specialisation and trade. Make up your own numbers, you are not allowed to simply use the examples from your textbook. Your answer should include an appropriate diagram(s). Note that a table of numbers is not a diagram. As part of your answer you should ensure that you use, and fully explain the following concepts.
a. Opportunity cost
b. Comparative advantage
c. Production possibility frontier
d. Terms of trade
e. Trade line
f. Gains from trade
2. Consider the following Marginal Private Cost (MPC), Marginal Social Cost (MSC) and market demand curves. These curves relate to a market for a product, the production of which generates a negative externality. Use these equations to answer the questions from a) to e). In answering questions a) to e) make sure that you also use a fully labelled and explained diagram.
MPC = 10 + 10Q
MSC = 10 + 12 Q
P = 70 – 5Q
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a. What is the private market equilibrium P and Q?
b. What is the socially efficient equilibrium P and Q?
c. Explain in words why the equilibrium in a) is not efficient. Explain in words why the equilibrium in b) is efficient.
d. Calculate the deadweight loss from the negative externality in this scenario.
e. What is the size of the Pigovian Tax required to produce the efficient equilibrium? How much revenue would the government collect if it imposes this tax?
f. Explain in words how a system of marketable permits differs from the Pigovian Tax as a way to correct for the inefficiency associated with the negative externality. Why do economists tend to prefer a system of marketable permits over the Pigovian Tax? There is no need to use a diagram in your answer to f).
3. The manager of the world famous Koala Caves offers a tour each afternoon starting at 3pm. The caves can be shown to only four people per day without undermining their ecology. Occasionally however, more than four people...