BEA111 Principles Of Economics For Opportunity Cost Per Tonne

Question 1

 

Australian and Japanese workers can each produce four cars per year. An Australian worker can produce 10 tonnes of grain a year, whereas a Japanese worker can produce five tonnes of grain a year. Assume that each country has 100 million workers.

 

a) Which country has the absolute advantage in producing cars? Which country has the absolute advantage in producing grain? Explain your conclusions.
b) Which country has the comparative advantage in producing grain? Which country has the comparative advantage in producing cars? Explain.

 

Question 2

 

The following table describes the production possibilities for producing shirts for tourists by two businesses in Hobart:

Red shirts per worker per hour Blue shirts per worker per hour
Shirt Shack 2 1
Just Shirts 3 3

 

For example, the table reports that Shirt Shack can produce 2 red shirts in one hour, whereas Just Shirts can produce 3 red shirts in one hour.
a) Suppose that the two companies decide to specialize and trade with each other to increase their output. Which colour shirt should Shirt Shack produce? Which colour shirt should Just Shirts produce? You must provide support for your conclusions.
b) Identify the bounds on the terms at which they would agree to trade shirts? Express your answer in terms of the amount of red shirts that would be ‘paid’ for a blue shirt. Explain your answer.

 

Question 3

 

The market for wheat has the following demand and supply schedules:

 

Price ($/tonne) Quantity Demand (100 tonnes) Quantity Supplied (100 tonnes)

4 135 26
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121
10 0 133
a) What is the equilibrium price and quantity in this market?
b) Suppose a price floor was implemented in this market equal to $8/tonne. Calculate the excess demand or excess supply created by the price floor.
c) Use a supply and demand diagram to illustrate how the price floor affects Total Surplus. Be sure to label all part of the diagram.

Question 4

 

Use a supply and demand analysis to predict what will happen to the equilibrium price and quantity of oranges if oranges are discovered to help prevent colds AND excellent weather has increased the number of oranges that can be harvested. You must provide clearly labelled supply and demand diagrams. You must also provide well-written economic arguments supporting your diagrams.

 

Answer:

Question 1

No country has an absolute advantage in producing cars as the car producing capacity is same for both the country. However, with regards to grain, it is apparent that by using the same amount of resources, the output for a Australian worker is higher in comparison with the Japanese worker. Hence, it would be apt to conclude that Australia has the absolute advantage in producing grain.

The comparative advantage in producing grains lies with Australia since the opportunity cost in terms of car production is lesser for Australia as compared to Japan. This can be explained below.

Opportunity cost per tonne of grain by a worker in Japan = (4/5) = 0.8 cars

Opportunity cost per tonne of grain by a worker in Australia = (4/10) = 0.4 cars

The comparative advantage with regards to car production lies with Japan since the opportunity cost in terms of grain production is lesser for Japan as compared to Australia. This can be explained below.

Opportunity cost per car by a worker in Japan = (5/4) = 1.25 tonnes

Opportunity cost per car by a worker in Australia = (10/4) = 2.5 tonnes 

Question 2

Shirt shack should produce the red shirt since it has a comparative advantage in the production of the same as compared to Just Shirts. This can be highlighted by computing the relevant opportunity cost.

Opportunity cost per red shirt per worker for Shirt shark = (1/2) blue shirt

Opportunity cost per red shirt per worker for Just Shirts = (3/3) blue shirt = 1 blue shirt

With regards to the blue shirt, Just shirts should produce the same as it has a comparative advantage in the production of the same as compared to Shirt Shack . This can be highlighted by computing the relevant opportunity cost.

Opportunity cost per blue shirt per worker for Shirt shark = (2/1) red shirt = 2 red shirt

Opportunity cost per blue shirt per worker for Just Shirts = (3/3) red shirt = 1 red shirt

The bounds of the trade should be 4 red shirts for 3 blue shirt. This amounts to trade at the rate of 1 red shirt per (0.75) blue shirt. At this rate, there would be incentive for both the parties to engage in trade. Just shirts would be able to get red shirt at the rate higher than the opportunity cost. Same observation can be made for the Shirt Shack company that would also be benefitted from the trade and hence created a win- win situation for the parties involved. 

Question 3

1. The equilibrium price is $ 6 per tonne as at this price, the quantity demanded and quantity supplied are the same. The equilibrium quantity is 8,100 tonnes.
2. It is apparent at the price of $ 8 per tonne, there is a demand of 5,300 tonnes while the corresponding supply is 11,000 tonnes. Hence, there would be excess supply created at this floor price to the tune of (11000-5300) = 6,700 tonnes.
3. The requisite demand supply diagram is indicated below. 

In the given case, P_o = $ 6 and P₂ = $8. Also, Q₀ refers to the original equilibrium quantity which is equal to 8100 tonnes. The new equilibrium quantity is indicated by Q₁ which equals 5300 tonnes which is the demand.  It is apparent that there is a decrease in the consumer surplus which has shrunk to only the yellow portion. Earlier part of the orange portion was consumer surplus. However, producer surplus has increased as highlighted in the orange portion. However, there is an overall decrease in the efficiency since deadweight loss has not arisen as represented in the pink region which earlier was zero. The total surplus denoted by the sum of producer and consumer surplus has also shown a decline owing to presence of deadweight loss after the introduction of floor price.

Question 4

If it is discovered that oranges do help in prevention of cold, then there would be an increase in the demand for the oranges which would cause a shift in the demand curve. On the other hand, excellent weather leading to bumper harvest of orange would imply an increase in the supply which would be reflected in the shift of the supply curve of oranges. The requisite demand supply diagram for the above changes is represented below.  

In the above case, owing to increase in demand, there is an upward shift in the demand curve represented by “New Demand”. If the supply curve would not have altered, then this would have led to an increase in the equilibrium price.  However, the supply also increased as explained above which led to downward shifting of the supply curve to “New Supply”. In the given case, it has been assumed that the price effects of both these moves balance each other and hence the new equilibrium price is the same as old equilibrium price reflected in P1 and P2 being equal. However, there is an increase in the equilibrium quantity of oranges from Q1 to Q2.