1. (a) Explain the difference between implicit cost and explicit cost.

(b) List several explicit costs an implicit costs for an owner of a coffee shop who sells coffee and sandwiches daily, who owns the land and building where the coffee shop and owns all the equipment inside the shop.

2. (a) Explain the difference between Fixed Cost and Variable Cost.

(b) List the Fixed Costs and Variable Costs of driving to and back from the beach this Saturday.

3. (a) State the Definition Formula (from the lectures) for the Price Elasticity of Supply.

(b) Use the formula in (a) to determine the change in quantity supplied if the price of steel increases by 5% when the Price Elasticity of Supply for steel is 3.

4. Nation A can produce with one worker per day 10 cakes or 5 pizzas.

Nation B can produce with one worker per day 8 cakes or 2 pizzas.

a. What country has the absolute advantage in pizzas? Explain your answer with numbers.

b. What country has the absolute advantage in cakes? Explain your answer with numbers.

c. Determine the opportunity cost of producing 1 pizza in Nation A.

d. Determine the opportunity cost of producing 1 pizza in Nation B.

e. Determine the opportunity cost of producing 1 cake in Nation A.

f. Determine the opportunity cost of producing 1 cake in Nation B.

g. What country has the comparative advantage in pizzas and, thus, will specialize in pizzas when trading? Explain you answer with numbers.

h. What country has the comparative advantage in cakes and, thus, will specialize in cakes when trading? Explain your answer with numbers.

i. Determine a trade agreement for 1 pizza (price in terms of x number of cakes for 1 pizza) that both countries would benefit from. (Do not give me a range of prices. Just give me one price and one price only.) (Hint: who will be buying and who will be selling pizzas?)

j. Explain (using numbers) how Nation A would benefit from your answer to (i) above.

k. Explain (using numbers) how Nation B would benefit from your answer to (i) above.

5.

(a) Define Postitive Externalities.

(b) Explain how Positive Externalities lead to loss in Social Surplus.