Chapter 16

Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run $(Q_G=75\text{ and }{Q}_S=300)$ and that the demands for gold and silver are given by the following equations: $$P_G=975-Q_G+0.5P_S\text{ and }{P}_S=600-Q_S+0.5P_G$$ a. What are the equilibrium prices of gold and silver? b. What if a new discovery of gold doubles the quantity supplied to $150?$ How will this discovery affect the prices of both gold and silver?

Using general equilibrium analysis, and taking into account feedback effects, analyze the following: a. The likely effects of outbreaks of disease on chicken farms on the markets for chicken and pork. b. The effects of increased taxes on airline tickets on travel to major tourist destinations such as Florida and California and on the hotel rooms in those destinations.

Jennifer and Drew consume orange juice and coffee. Jennifer's MRS of orange juice for coffee is 1 and Drew's MRS of orange juice for coffee is 3. If the price of orange juice is $\mathrm{\$}2$ and the price of coffee is $\mathrm{\$}3,$ which market is in excess demand? What do you expect to happen to the prices of the two goods?

In the analysis of an exchange between two people, suppose both people have identical preferences. Will the contract curve be a straight line? Explain. Can you think of a counterexample?

Give an example of conditions when the production possibilities frontier might not be concave.

A monopsonist buys labor for less than the competitive wage. What type of inefficiency will this use of monopsony power cause? How would your answer change if the monopsonist in the labor market were also a monopolist in the output market?

The Acme Corporation produces $x$ and $y$ units of goods Alpha and Beta, respectively. a. Use a production possibility frontier to explain how the willingness to produce more or less Alpha depends on the marginal rate of transformation of Alpha or Beta. b. Consider two cases of production extremes: (i) Acme produces zero units of Alpha initially, or (ii) Acme produces zero units of Beta initially. If Acme always tries to stay on its production possibility frontier, describe the initial positions of cases (i) and (ii). What happens as the Acme Corporation begins to produce both goods?

In the context of our analysis of the Edgeworth production box, suppose that a new invention changes a constant-returns-to-scale food production process into one that exhibits sharply increasing returns. How does this change affect the production contract curve?