University Economics ECO101 Assignment 2: Analysis of Economic Models

This economics assignment solution for ECO101 addresses key microeconomic concepts. It begins with an analysis of production possibilities, comparative advantage, and specialization between two individuals, Jara and Peng, calculating maximum production levels of coffee and nuts. The solution explores the production possibility curve and the impact of specialization. The assignment then delves into supply curves, aggregating individual firm supply to derive market supply. Price elasticity of demand is calculated, exploring its impact on revenue. Finally, the assignment examines production possibility curves, comparative advantage, and the structure of the long-run market supply curve under perfect competition, considering constant, increasing, and decreasing cost industries. The solution includes figures and references to support the analysis.

Running head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................3
Answer 2..........................................................................................................................................6
Answer 3..........................................................................................................................................6
Answer 4..........................................................................................................................................8
References......................................................................................................................................12

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Answer 1
1.a)
i) The maximum kilogram of coffee Jara can pick by investing all the 6 hours in coffee is
(4*6)=24. Similarly the maximum kilogram of coffee that Peng can pick is (2*6)= 12.
Therefore, the maximum kilograms of coffee the two can pick in a day is (24+12) units= 26
units.
ii) The maximum kilogram of nuts Jara can pick by investing all the 6 hours in coffee is (2*6) =
12. Similarly the maximum kilogram of coffee that Peng can pick is (4*6)= 24
Therefore, the maximum kilograms of coffee the two can pick in a day is (12+24) units= 26
units.
iii) By investing 1 hour Jara can produce only 2 kilograms of nuts. Therefore, to pick 4
kilograms of nuts Jara has to spend 2 hours. For Peng, only 1 hour is sufficient for picking 4
kilograms of nuts. Therefore, when they decided of picking maximum number of kilograms of
coffee and start picking with 4 kilogram of nuts it will be an optimal decision for Peng to pick up
nuts because Peng has a comparative advantage in picking nuts (Feenstra 2015). The kilograms
of coffee they would still able to pick is- (4*6) + (5*2)= 34 kilogram.
iv) In order to produce 4 kilograms of coffee jara need only one hour whereas Peng need 2 hours.
This indicates Jara has a comparative advantage in producing coffee. Thus, when they decided of
choosing maximum number of nuts and starts with picking 8 kilograms of coffees, Jara would
pick coffee.

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Number of kilograms of nuts they would still be able to pick is (2*4) + (4*6)= 32 kilogram.
v) Yes, it is possible for Jara and Peng to pick a total of 26 kilograms of nuts and 20 kilograms of
coffee each day. Since, Jara has a comparative advantage in Coffee he has to produce he needs
to produce more coffee and Peng needs to produce more nuts. In order to have 26 kilogram of
coffee Jara invests 5 hours and produces 20 kilogram of coffee and using rest of the 1 hour Jara
produces 2 kilogram of nuts. Peng produces 24 kilogram of nuts using all the 6 hours, making
(2+24)= 26 kilogram nuts attainable in a day.
b)i) Yes, 30 kilograms of coffee per day and 12 kilograms of nuts is an attainable point. In this
situation, Jara uses all the 6 hours in producing a total of (4*6)=24 kilograms of coffee. The rest
(30-24)=6 kilograms of coffee will be produced by Peng using 3 hour. In the rest of the 3 hours
Peng produces (4*3)= 12 kilogram of nuts. 24 kilograms of coffee and 24 kilograms of nuts per
day is also a feasible and efficient point (Laursen 2015.). Here Jara choose to pick 24 kilograms
of coffee and Peng picks 24 kilograms of nuts on a day.
ii)

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Figure 1: Production Possibility Curve showing different Combination of coffees and nuts
(Source: as created by Author)
iii) If Jara and Peng completely specialize in goods in which they have a comparative advantage
then Jara will specialize in Coffee and produces 24 kilograms of coffee. Similarly, Peng
specializes in nuts and produces 24 kilogram of nuts. At the world price of $2 per kilograms of
coffee and $2 per kilograms of nuts they Jara could earn (24*$2) = $48 and Peng earns (24*$2)=
$48. That is a total of ($48+$48) = $96 could be earned by selling their products in the world
market.
iv) When they have $96 per day to spend and the price in the world market is $2 for each
kilogram of coffee and nuts, the maximum amounts of coffee that Jara and Peng can pick is 48
kilograms. Similarly, the maximum kilograms of nuts they can pick is 48 kilograms.
In the world market 40 kilograms of coffee costs (40*$2) = $80 and 8 kilogram of nuts cost
(8*$2)= $16. Thus, the total cost is ($80+$16) = $96. Given that they have earned $96 by selling
their specialized good, they are able to purchase 40 kilograms of coffee and 8 kilogram of nuts.
v)

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Figure 2: Combination of nuts and coffee that can be consumed
(Source: as Created by the Author)
Answer 2
The supply curves for the two firms are given as P= 2Q1 and P= 2 + Q2
For the first firm,
P= 2Q1
Or, Q1= P/2
Similarly for the second firm,
P= 2 + Q2
Or, Q2 = P – 2
The market supply curve is obtained from the horizontal summation of two firm’s supply curve
(Borenstein 2013)

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Answer 3
a)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
0
1
2
3
4
5
6
7
NUMBER OF CROISSANTS PURCHASED PER
DAY
NUMBER OF CROISSANTS
PURCHASED PER DAY
Figure 3: Demand curve of croissants in Geelong
b) Price elasticity at a point is calculated using the following method (Sposi 2012)
Price Elasticity = Percentage change ∈demand at a point
Percentage change∈ price at that point
Using this formula the price elasticity at the point when price is $3 is obtained as 1.
P Q dP dQ
% change in
price % change in quantity
Elasticit
y
3 9000 1 3000 33.33333333 33.33333333 1
c) An increase in the price from $3 to $4 decreases the revenue from $27000 to $24000.
d) Price elasticity at the point $ 2 obtained as 0.5.
P Q dP dQ % change in % change in Elasticit

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price quantity y
2 12000 1 3000 50 25 0.5
e) When all the bakeries increased prices from $2 to $3, there will be an increase in revenue from
$24000 to $27000.
Answer 4
a)Production possibility is obtained from different attainable combination of goods and services
in the nation. The movement from one point to another on the PPC reflects the opportunity cost
involved in producing different combination of goods (Reinert 2012). A country has a
comparative advantage in goods that it can produce with lowest opportunity cost.
Figure 4: production possibility curve and comparative advantage
(Source: as created by Author)
Suppose using all the resources the country can produce only two goods drainpipes and
butter. To increase the production of drainpipes the country has to reduce its production of

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butter. If the country has a comparative advantage in butter the increasing production drainpipes
decreases production of butter largely. This makes PPC steeper. Similarly, if the country has
comparative advantage in drainpipes, then increasing production of drainpipes involve lower
opportunity cost. At this point, the slope of PPC is flatter (Belleflamme and Peitz 2015). This
means the opportunity cost of production increases as the country produces more of something.
The comparative advantage and increasing opportunity cost together makes the production
possibility curve bowed out and negatively sloped.
b) Under operation of a perfectly competitive market, the structure of the long run marke6t
supply curve depends largely on the prices in the factor market. The long run market supply
curve can be positively sloped, horizontal straight line or negatively sloped depending on cost
structure. The industry might operate under increasing cost, constant cost or decreasing cost.
Constant cost industry:
In case of constant cost industry, even if there is an increase in output cost remains
constant (Baumol and Blinder 2015). The figure below describes the long run curve of the
industry.

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Figure 5: Industry supply curve with constant cost industry
(Source: Mankiw 2012)
In panel (a) of the figure, P1 and Q1 are the initial price and quantity in the market.
Corresponding to this point there are all the firms In the market attain equilibrium satisfying the
condition P==LAC=SAC=LMC=SMC. Now, suppose that there is an increase in demand as
indicates by the outward shift of the demand curve from DD1 to DD2. This raises the price in the
market to P2. In the short run, individual firm increases their supply only by MN. However, with
increasing profit prospect in the industry more firms will enter in the industry. This increases
composite supply of the industry as reflected from the shift of the supply curve from SS1 to SS2.
This pushes down the price toP1 again. The equilibrium point in the industry shifts from P to P’’.
In the new equilibrium price remain the same though increases. Therefore, the supply curve in
the industry is a horizontal straight line as reflected by LRS in the figure.
Increasing Cost industry:
In the increasing cost industry, cost increases with an increase in output (Waldman and
Jensen 2016). The supply curve in the industry is explained in the following figure.

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Figure 5: Industry supply curve with increasing cost industry
(Source: Mankiw 2012)
In response to supernormal profit when new firms enter in the industry, the far demand
increases and hence cost. The shirt run cost curve shifts and a new equilibrium point obtained as
point E2. Consequently, market supply curve shifts outward increasing industry supply. Price
also increases now. Therefore, a positively sloped industry supply curve is obtained.
Decreasing Cost industry
In a decreasing cost industry, cost decrease with increase in output (Varian 2014). Here,
the industry supply curve is negatively sloped as shown in following figure.

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Figure 5: Industry supply curve with decreasing cost industry
(Source: Mankiw 2012)