Comparative Advantage
Suppose Steve can specialize and produce either 1600 rugs and 0 paintings, or 0 rugs and 800 paintings; and Cindy can produce 250 rugs and 0 paintings, or 0 rugs and 1000 paintings, and assuming constant opportunity costs:
State which person has a comparative advantage in rugs. Explain why.
Using your answer in part a, if the terms of trade are 3 rugs = 2 paintings, and Steve
initially produces 900 rugs and 350 paintings, and Cindy initially produces 175 rugs and 300 paintings, what are the gains from specialization and trade to each person if Steve trades 600 units of the good he has a comparative advantage in?
Supply and Demand
Given QD = 800 â 2P and QS = 2P + 100, what is the market equilibrium price (P*) and
quantity (Q*)?
Suppose a change occurs in the market such that QDâ = 660 â 2P and QSâ= 2P + 100.
Calculate the new market equilibrium price (P**) and quantity (Q**).
Elasticity
From your answers in the supply and demand question above, use the mid-point
formula to calculate the price elasticity of supply (to two decimal places).
Using your answer in part a, is the price elasticity of supply elastic, inelastic or unit
elastic?
State how you were able to determine if the price elasticity of supply is elastic, inelastic
or unit elastic.