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Assignment 2

This summarizes a student's economics assignment containing two questions. Question 1 asks the student to graph the production possibilities frontiers for China and Bangladesh based on data provided, and determine if either country would benefit from trade in cushions and laptops. The student correctly explains that neither country has a comparative advantage so trade would not be beneficial. Question 2 asks the student to analyze how changes in various market factors would affect the equilibrium price and quantity of ketchup. The student analyzes seven scenarios involving changes in substitute/complement goods and production costs, and accurately determines how each would shift the demand and/or supply curves and impact the equilibrium price.

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Noor Khan
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603 views

Assignment 2

This summarizes a student's economics assignment containing two questions. Question 1 asks the student to graph the production possibilities frontiers for China and Bangladesh based on data provided, and determine if either country would benefit from trade in cushions and laptops. The student correctly explains that neither country has a comparative advantage so trade would not be beneficial. Question 2 asks the student to analyze how changes in various market factors would affect the equilibrium price and quantity of ketchup. The student analyzes seven scenarios involving changes in substitute/complement goods and production costs, and accurately determines how each would shift the demand and/or supply curves and impact the equilibrium price.

Uploaded by

Noor Khan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Name: Noor ul Huda Khan Semester: 1st

Subject: Principles of Economics Department: GPP


Marks: 10 Assignment # 2
Note: Attempt all questions. Each question carries equal marks.
Question #1.
Suppose that in a year a Chinese worker can produce 200 cushions or 30 laptops, while a Bangladeshi worker can
produce 120 or 18 laptops.

(a) Graph the production possibilities frontier for each of the two countries. Suppose that without trade the
workers in each country spend half their time producing each good.

b. If these countries were open to trade, which country would export cushions? Give a specific numerical example
and show it on your graph. Which country would benefit from trade? Explain.
None. Neither of these countries will trade with the other because none of them has a comparative advantage in the production of a
single product. The opportunity cost of producing 1 cushion is 0.15 laptops while the opportunity cost of producing 1 laptop is 6.6
cushions for both Chinese and Bangladeshi. The concept of comparative advantage suggests that as long as two countries have
different opportunity costs for producing similar goods, they can profit from specialization and trade. However, since both of these
countries have the same opportunity cost, neither will benefit from trade.

OPPORTUNITY COST
Commodity Cushion Laptop
Chinese 30/200 200/30
= 0.15 laptops = 6.6 cushions
Bangladeshi 18/120 120/18
= 0.15 laptops = 6.6 cushions
Similarly, if both of these decide to trade on the basis that China specializes in the production of cushions while Bangladesh in
laptops; China can give trade ten cushions in return for 1.5 laptops with Bangladesh. But either way, their production and consumption
level will return to the same point once the trade is done so proving that this trade is not beneficial.

Question #2.
What will happen to the equilibrium price and quantity of ketchup in each of the following cases? You should state
whether demand or supply (or both) have shifted and in which direction. (In each case assume ceteris paribus.)

(a) A rise in the price of chili sauce;


Chili Sauce is a substitute for Ketchup hence, a rise in its price will lead to an increase in demand for tomato ketchup. Since this is a
non-price factor, the demand curve will shift toward right and the Equilibrium price will increase.

(b) A rise in the demand for tomatoes;


Tomato is both a complement and condiment for Tomato Ketchup. A rise in demand for tomatoes will result in increased prices
making them more competitive in the market. This will increase the cost of production of tomato ketchup, resulting in decreased
supply of ketchup. Since this is a non-price factor, the supply curve will shift towards the left and the Equilibrium Price will increase.
(c) A rise in the price of pizza;
Pizza and Ketchup are in joint demand. A rise in the price of pizza will reduce its demand in the market according to the Law of
Demand. This will have a similar effect on the demand of ketchup causing it to fall. Since this is a non-price factor, the demand curve
will shift towards left and equilibrium price will fall.

(d) A rise in the demand for pizza;

Pizza and Ketchup are in joint demand, as stated earlier. A rise in the demand of Pizza will lead to a rise in demand for ketchup. This
will cause the demand curve to shift (due to non-price factors) to the right as a result of which, the equilibrium price will increase.

(e) An expected rise in the price of ketchup in the near future;


This will cause a supplier to store more products for the future as he/ she is expecting to make a greater profit. This will cause supply
to decrease at present so the supply curve will shift to the left and the equilibrium price will rise.
(f) A tax on ketchup production;
The tax would mean an addition to the cost of production which would directly result in decreased quantity supply. Since this is a non-
price factor, the supply curve will shift to the left and the equilibrium price will rise.

(g) The invention of a new, but expensive, process for removing all preservatives (that affect health) from ketchup
plus the passing of a law that states that all ketchup producers must use this process;
This invention will affect both the demand and supply of ketchup. As health-conscious people will increase their demand for the
product, the demand curve will shift to the right. And as the new process is expensive, the cost of production for the supplier will also
increase resulting in a decrease in supply causing the supply curve to shift to the left. As a result of both these shifts, due to a non-
price factor, the equilibrium price will rise altogether.

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