Microeconomics Assignment - ECO101: Comparative Advantage Analysis

This document presents a comprehensive solution to a microeconomics assignment (ECO101), addressing key concepts such as comparative advantage, production possibilities curves, supply and demand analysis, and price elasticity. The solution includes detailed explanations and calculations for problems involving production scenarios, market supply curves, and demand elasticity. It also covers the relationship between comparative advantage and increasing opportunity costs, as well as the factors influencing the long-run market supply curve in a perfectly competitive industry. The assignment explores topics such as the efficient allocation of resources, market equilibrium, and the impact of price changes on total revenues. The solution incorporates graphical representations to illustrate the concepts, making it a valuable resource for students studying microeconomics. The assignment also uses examples of coffee and nuts to explain the concepts of comparative advantage and opportunity costs.

Unit: ECO101 Microeconomics
Weighting: The assignment is worth 40% of the total unit weight.
Due Date: Friday, Week 5, 18th August
Instructions:
1. Students are required to cover all stated requirements.
2. Your answer must be both uploaded to Moodle in word file and
handed over a printed copy.
3. You need to support your answers with appropriate Harvard style
references where necessary.
4. Only include information in your appendixes that has been directly
referred to in the body of your document.
5. Include a title/cover page containing the subject title and code and
the name, student id numbers.
6. Please save the document as ECO101_B1_T1_first
name_Surename_Student Number
Eg:ECO101_AT2_John_Smith_20170000

Please discuss the following questions using concepts and knowledges you learned from
this course. The word limit is 1500 words in total. Each of these questions worth 10
marks.
1. a. Jara can pick 4 kilograms of coffee in an hour or 2 kilograms of nuts. Peng can pick
2 kilograms of coffee in an hour or 4 kilograms of nuts. Each works 6 hours per day.
The table below shows the maximum amounts of coffe and nuts that each person can pick.
We use the logic of 6 hours * kgs of each good that can be picked in each hour to get the
values in the table.
Coffee Nuts
JARA 24 12
PENG 12 24
i. What is the maximum number of kilograms of coffee the two can pick in a
day?
= 24+12 = 36 kgs
ii. What is the maximum number of kilograms of nuts the two can pick in a
day?
= 12 +24 = 36 kgs
iii. If Jara and Peng were picking the maximum number of kilograms of coffee
when they decided that they would like to begin picking 4 kilograms of nuts
per day, who would pick the nuts, and how many kilograms of coffee would
they still be able to pick?
We use the concept of opportunity cost here.
OC of Coffee for Jara= 12/24 = 0.5 kgs nuts
OC of coffee for Peng = 24/12=2 kgs nuts
So Jara has comparative advantage in coffee as her OC is lower.
Similarly for nuts .
OC of nuts for Jara= 24/12 = 2 kgs coffee
OC of nuts for Peng = 12/24=0.5 kgs coffee
So Peng has comparative advantage in nuts as her OC is lower.
Given freedom Jara will pick coffee only and Pend will pick nuts.
Now we have to get 4 kgs of nuts. Peng must do that as she has comparative
advantage in it. She can do this in 1 hour as per data. The rest 5 hours will
be spent on coffee, to get 2*5 = 10 kgs of coffee
Jara will spend all time on coffee to get 24 kgs.
So total coffee = 10 +24 = 34 kgs and 4 kgs nuts.
iv. Now suppose Jara and Peng were picking the maximum number of
kilograms of nuts when they decided that they would like to begin picking 8
kilograms of coffee per day. Who would pick the coffee, and how many
kilograms of nuts would they still be able to pick?
Given freedom Jara will pick coffee only and Pend will pick nuts.

Now we have to get 8 kgs of coffee. Jara must do that as she has
comparative advantage in it. She can do this in 2 hours as per data. The rest
4 hours will be spent on nuts, to get 4*2 = 8 kgs of nuts.
Peng will spend all time on nuts to get 24 kgs.
So total nuts = 8 +24 = 32 kgs and 8 kgs coffee.
v. Would it be possible for Jara and Peng to pick a total of 26 kilograms of
nuts and 20 kilograms of coffee each day? If so, how much of each good
should each person pick?
As Peng is better at nuts she can spend all time getting 24 kilos. Jara needs
20/4= 5 hours to get 20 kgs of coffee. The remaining 1 hour can be spent on
nuts to get 2 kgs. This way total nuts = 24+2= 26 kgs.
So the total of 26 kilograms of nuts and 20 kilograms of coffee each day is
achievable.
Nuts: Peng picks 24 kgs and Jara picks 2 kgs
Coffee: Jara picks all 20 kgs coffee.
b.
i. Is 30 kilograms of coffee per day and 12 kilograms of nuts per day an
attainable point? Is it an efficient point? What about 24 kilograms of
coffee per day and 24 kilograms of nuts per day?
As Jara is better at coffee she can spend all time getting 24 kilos. Peng
needs 12/4= 3 hours to get 12 kgs of nuts. The remaining 3 hours can be
spent on coffee to get 3*2 = 6 kgs. This way total coffee = 24+6= 30 kgs.
So the total of 12 kilograms of nuts and 30 kilograms of coffee each day is
achievable.
Nuts: Peng picks all 12 kgs.
Coffee: Jara picks 24 kgs and Peng pick 6 kgs.
ii. On a graph with kilograms of coffee per day on the vertical axis and
kilograms of nuts per day on the horizontal axis, show all the points you
identified in Problem 6a, parts i–v and Problem 6bi. Connect these points
with straight lines to show the PPC for the economy consisting of Jara and
Peng.

The points for Q6 part b(i) are shown above on each PPC above
Part a(i)
Part a(ii)
12 kgs nuts and 6 kgs
coffee
24 kgs coffee
24 kgs coffee
12 kgs coffee

Part a(iii)
Part a(iv)
12 kgs nuts
24 kgs
10 kgs coffee and 4 kgs nuts
24 kgs coffee

Part a(v)
iii. Suppose that Jara and Peng could buy or sell coffee and nuts in the world
market at a price of $2 per kilogram for coffee and $2 per kilogram for
nuts. If each person specialised completely in the good for which he or she
had a comparative advantage, how much could they earn by selling all
their produce?
Since Peng specialises in nuts she will produce 24 kgs and sell for 2*24 =
$48.
Since Jara specialises in coffee she will produce 24 kgs and sell for $48.
iv. At the prices just described, what is the maximum amount of coffee Jara
and Peng could buy in the world market? What is the maximum amount of
nuts? Would it be possible for them to consume 40 kilograms of nuts and 8
kilograms of coffee each day?
World exchange rate = price ratio = 2/2 = 1
8 kgs coffee and 8 kgs nuts
24 kgs nuts
20 kgs coffee and 2 kgs nuts
24 kgs nuts

Jara exchange ratio = 24/12 = 2 Coffee/Nuts
Peng exchange rate = 12/24 = ½ Coffee/Nut.
Jara will sell all coffee. She will not buy as she has comparative advantage
in coffee and will sell of her produce.
Peng can buy 48/2= 24 kgs of coffee.
Nuts:
Peng will sell all her nuts. She will not buy as she has comparative
advantage in nuts and will sell of her produce.
Jara can buy 48/2= 24 kgs of nuts
A combination of 40 kgs nuts and 8 kgs coffee is not possible, as the ratio
becomes 8/40 = 1/5C/N. This is lower than the range of 0.5 and 2 which is
given in the data.
v. In light of their ability to buy and sell in world markets at the stated prices,
show on the same graph all combinations of the two goods it would be
possible for them to consume when each specialises in the good in which
they have a comparative advantage.

2. The supply curves for the only two firms in a competitive industry are given by P =
2Q1and P = 2 + Q2, where Q1 is the output of firm 1 and Q2 is the output of firm 2. What is
the market supply curve for this industry? (Hint: Graph the two curves side by side, then add
their respective quantities at a sample of different prices.)
We add the two supply curves for a given Q as follows
Firm 1: :
P = 2Q1
Q1 = P/2
Firm 2:
P= 2+Q2
Q2= P-2
So Qs = Q1 +Q2 = P/2 +P – 2 = 3P/2 – 2
Market supply is Qs = 1.5P – 2
3. The table below shows the number of croissants bought in Geelong, Victoria, each day at a
variety of prices.
PRICE OF CROISSANTS ($) NUMBER OF CROISSANTS PURCHASED PER DAY
6 0
5 3000
4 6000
3 9000
2 12000
1 15000
0 18000
a) Graph the daily demand curve for croissants in Geelong.

b) Calculate the price elasticity of demand at the point on the demand curve at which the
price of croissants is $3.
Using the point elasticity method, elasticity= (1/ slope) * P/Q
= -18000/6 * (3/9000) = -1
Demand is unitary elastic at this point, as this happens to be the midpoint of the
demand curve as well.
c) If all bakeries increased the price of croissants from $3 to $4, what would happen to
total revenues?
Revenues will fall from 27000 to 24000.
P Q TR
6 0 0
5 3000 15000
4 6000 24000
3 9000 27000
2 12000 24000
1 15000 15000
0 18000 0
d) Calculate the price elasticity of demand at a point on the demand curve at which the
price of a croissant is $2.
Using the point elasticity method, elasticity= (1/ slope) * P/Q
= -18000/6 * (2/12000) = -1/2
Demand is inelastic at this point, as its value is less than 1. (Gallo)
e) If all bakeries increased the price from $2 to $3 per croissant, what would happen to
total revenues?
Revenues will rise from 24000 to 27000.
(Price elasticity of demand )
4. Please explain the following questions with examples and theoretical support.

a) In what way does the notion of comparative advantage help to explain that production
possibilities curves are bowed outward (the principle of increasing opportunity cost)?
Explain your answer in the context of the trade-off between drainpipes and butter.
A PPC (Rittenburg & Tregarthen) is bowed out due to increasing opportunity costs
of producing a good. Consider butter and drainpipes.
This means that to produce more of butter we must reduce pipes
as our resources are fixed. We have to move from point A to B. To
produce more butter, we have to pull out resources ( like
labor )from pipe factories and put them into butter factories. We
reduce pipes by red line as we move from A to B to get 1 more
unit of butter. As we move from B to C we still get 1 more butter
unit but we need to give up more pipes now, as shown by green
line.
Thus we give up more and more of pipes to get 1 unit of butter.
This is why we cal this increasing opportunity costs of butter.
(Production Possibility curves)
This happens because inputs like labour are not equally efficient
at producing both pipes and butter. Each input will be efficient at
producing any one good, which gives comparative advantage to
production of that good.
b) Explain how the long-run market supply curve for a perfectly competitive industry
depends on factor prices.
The long run market supply (SS) tells us the total supply in the market at different
prices. (LR competitive equilibrium in an economy with production)We can have
3 types of SS
 constant cost SS which is horizontal.
 Increasing cost SS which is upward sloping
 Decreasing cost SS which is down sloping

The long run supply curve aggregates the supply of all firms in the long run
after accounting for the response of supply to rising demand. Consider
diagram a. We start with D1 and S1 and equilibrium price at P1. As demand
rises from D1 to D2 in the short run prices will rise to P2. This encourages
profits which makes newer firms enter this industry. More firms implies
higher supply. The short run supply curve shifts down from S1 to S2. The new
equilibrium is now at higher price of P2. The long run market supply curve is
found by the locus of all equilibrium points of the short run. Here we show
two such points –E1 and E2.
In the next diagram, we have a upward sloping long run supply curve. While the method of
derivation is same, there is one difference that causes the slope to be different. When more
firms enter it leads to demand for inputs. The increase in demand for inputs can lead to 3
things:
1. Price of inputs does not change- this causes horizontal long run supply curve. The
name given is CONSTANT cost industry as prices of inputs remain constant
2. Price of inputs rises- this causes long run supply curve to be upward sloping. The
name given is INCREASING cost industry as prices of inputs increase.
3. Price of inputs fall- this causes long run supply curve to be down sloping. The name
given is DECREASING cost industry as prices of inputs falls.
Thus, the shape of long run supply curve depends on how inputs/factor markets
behave. (Perfect Comnpetition in the Long run)
E1
E2

References
CSun.edu, n.d. Microeconomics. [Online] Available at: HYPERLINK
"http://www.csun.edu/sites/default/files/micro3.pdf"
http://www.csun.edu/sites/default/files/micro3.pdf [Accessed 2 June 2017].
Econlib.org, n.d. Comparative advantage. [Online] Available at: HYPERLINK
"http://www.econlib.org/library/Topics/Details/comparativeadvantage.html"
http://www.econlib.org/library/Topics/Details/comparativeadvantage.html [Accessed 31 July 2017].
Economics.utoronto.ca, n.d. LR competitive equilibrium in an economy with production. [Online]
Available at: HYPERLINK "https://www.economics.utoronto.ca/osborne/2x3/tutorial/LRCE.HTM"
https://www.economics.utoronto.ca/osborne/2x3/tutorial/LRCE.HTM [Accessed 14 August 2017].
Economicsonline.co.uk, n.d. Comparative advantage. [Online] Available at: HYPERLINK
"http://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html"
http://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html [Accessed 31
july 2017].
economicsonline.co.uk, n.d. Price elasticity of demand. [Online] Available at: HYPERLINK
"http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html"
http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html
[Accessed 15 August 2017].
Gallo, A., n.d. A refresher on price elasticity. [Online] Available at: HYPERLINK
"https://hbr.org/2015/08/a-refresher-on-price-elasticity" https://hbr.org/2015/08/a-refresher-on-
price-elasticity [Accessed 15 August 2017].
Krpton.mnsu.edu, n.d. Production Possibility curves. [Online] Available at: HYPERLINK
"http://krypton.mnsu.edu/~cu7296vs/ppc.htm" http://krypton.mnsu.edu/~cu7296vs/ppc.htm
[Accessed 15 Auguat 2017].
Open.lib.umn.edu, n.d. Perfect Comnpetition in the Long run. [Online] Available at: HYPERLINK
"https://open.lib.umn.edu/principleseconomics/chapter/9-3-perfect-competition-in-the-long-run/"
https://open.lib.umn.edu/principleseconomics/chapter/9-3-perfect-competition-in-the-long-run/
[Accessed 15 August 2017].
Rittenburg, L. & Tregarthen, T., n.d. Principles of Economics V 1.0. [Online] Available at: HYPERLINK
"https://catalog.flatworldknowledge.com/bookhub/22?e=rittenecon-ch02_s03"
https://catalog.flatworldknowledge.com/bookhub/22?e=rittenecon-ch02_s03 [Accessed 14 August
2017].
SSC.wise.edu, n.d. Supply and demand. [Online] Available at: HYPERLINK
"http://www.ssc.wisc.edu/~scholz/Teaching_101/Lecture3.pdf"
http://www.ssc.wisc.edu/~scholz/Teaching_101/Lecture3.pdf [Accessed 1 June 2017].