Economic Principles and Decision Making: ECON6000 Assessment 2

This economics assignment solution analyzes the impact of various factors on the demand for a product called "Schmeckt Gut." Problem A uses linear regression to assess how adding more stores affects demand, revealing a positive correlation. Problem B examines the influence of tariffs, showing that lower tariffs increase demand and benefit consumers, though there's a deadweight loss. The solution also provides a diagram to illustrate the impact of tariffs. Problem C discusses free trade, predicting increased demand and economic growth for both involved countries, along with efficient resource allocation and benefits for consumers. The assignment concludes that free trade yields significant advantages for both the importing and exporting nations. The solution references several economics textbooks to support its analysis.

ECONOMIC PRINCIPLES AND DECISION MAKING
STUDENT ID:
[Pick the date]

Problem A
In wake of the given data, the objective is to analyze the impact of offering the Schmeckt Gut at
another store on the overall demand of the product in Atoilia. In this regards, the data provided
by the research department would be used as a linear regression would be performed with store
count being an independent variable and demand of Schmeckt Gut energy bar being the
dependent bar. The result obtained by performing regression in Excel is shown below.
The key observation from the above regression model is that the slope coefficient is 4.072.
Considering that the slope of the regression is positive, it would imply that the presence of
Schmeckt Gut energy bar at one additional store would result in higher demand for the product.
To analyze the precise impact on demand, the slope coefficient needs to be interpreted. This
would imply that increase in the store where Schmeckt Gut energy bar by 1 unit would result in
incremental impact on average demand per person by 4.072. Further, it needs to be outlined that
the slope coefficient of number of stores variable is statistically significant at 5 percent level of
significance. This is because the p value corresponding to the t value of the slope coefficient is
0.047 and thus less than 0.05 (Barro, 2017). Hence, it would be correct to conclude that
increasing the stores where Schmeckt Gut is available would result in higher demand for the
product.
2

Problem B
1) The multiple linear regression model estimated above can be used to estimate the impact of
tariffs on the demand of Schmeckt Gut energy bar in Atoilia. With regards to tariffs on
imports, it is evident that the slope coefficient is negative which highlights that a higher tariff
rate tends to increase the price of the imported goods and hence lowers the demand amongst
consumers. The value of the coefficient is -6.457 which implies that a 1 percent decrease in
the tariff rate would increase the average demand of Schmeckt Gut energy bar in Atoilia by
6.457. Further, the slope coefficient of tariff is significant considering that the p value
associated with the corresponding slope coefficient is 0.00 and hence lower than the assumed
level of significance of 0.05. Thus, reduction of import tariff would result in higher trade
between Industria and Atoilia in regards to Schmeckt Gut on account of higher demand from
Atoilia (Koutsoyiannis, 2015).
2) The requisite diagram to consider the impact of tariffs is shown below.
It is apparent from above that owing to imports from Industria, the prices in Atolie are lower and
hence importing tends to aid the consumer surplus since they are able to enjoy lower prices. The
government of Atoilia is also able to garner some tax revenue based on the import duties. The
3

producers are also gaining owing to increased demand from domestic producers owing to prices
being lower than without trade (Mankiw, 2016). Thus, it is evident that owing to trade of energy
bar from Industria, the producers, consumers and the consumers are benefitted. However, there is
deadweight loss as indicated in the diagram above. Eradication of tariffs would result in
incremental benefit for the consumers and producers in Atoilia (Krugman & Wells, 2015).
Problem C
1) Free trade would imply that the tariff barriers are completed eliminated. This would tend to
increase the demand per person for the Schmeckt Gut which can be predicted on the basis of
the multiple regression results. The increased demand would imply that imports from
Industria would increase which would aid economic growth in Industria as producers would
be able to supply to a new market without any trade restrictions (Barro, 2017). Also, free
trade would ensure efficient deployment of resources. This is because the country that is
more efficient at the production of Schmeckt Gut would specialize in the production of same
based on lower opportunity cost. This would allow the other country to deploy the resources
freed from production of Schmeckt Gut to more productive use (Krugman & Wells, 2015).
Also, in wake of free trade , the consumers of Atoilia would be benefitted as the rates would
further be decreased than the current rates. The producers in Atoilia would be adversely
impacted in the short run as their profits may decrease but in the long run it would enhance the
efficiency of producers by allowing for efficient use of resources. Further, a key benefit would
be that deadweight loss would also not be incurred in case of free trade as the domestic prices
and world prices would be at parity (Mankiw, 2016). Hence, it is appropriate to conclude that
significant gains would arise for both Atoilia and Industria based on free trade.
4

References
Barro, R. (2017). Macroeconomics: A Modern Approach (4thed.). London: Cengage Learning.
Koutsoyiannis, A. (2015). Modern Macroeconomics (4th ed.). London: Palgrave McMillan.
Krugman, P. & Wells, R. (2015).Macroeconomics (3rd ed.). London: Worth Publishers.
Mankiw, G. (2016). Principles of Macroeconomics (6th ed.). London: Cengage Learning
5