ECO 101, Assignment 1,

Total Marks: 40, Submission: 10 PM, 03 April, 2021.

Name: Fariya Jiban

ID: 1822062042

Section no.:19

Question 1: Indicate True (T) or False (F) for the following questions, and explain your answer in 50 words (for each
question). {4 x 5 marks = 20 marks}

1. If a society wishes to achieve high degree of efficiency, then it must also accept a high level of inequality.

Ans: True

Efficiency and equality are like vice-verse. If one rises then another falls. When society wants to get the
highest from its scarce resources then it is called efficiency. On the contrary, when society tries to get
equal for all then that is equality. To achieve highest efficiency then you must accept a high level of
inequality.

2. Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.

Ans: True

In trade there are lots of competitors but there is no win or lose. Trade helps countries to gain absolute
advantage that means the investment or the inputs are fewer than any other producer. Countries can
gain better price by trading abroad. Trade allows countries to grow or produce goods at home by
specialization and can enjoy better variety of goods and services.

3. If a certain trade is good for one person, it can’t be good for the other one.

Ans: False

I am not agree with it because trade is something which makes everyone better off . Without any profit
nobody will not like to trade. Trade can be done when both can get better off other wise nobody will
trade.
 4. Two countries can achieve gains from trade even if one of the countries has an absolute advantage in t he
production of all goods.

Ans: True

If one country has absolute advantage in all goods than another can gain according to opportunity cost
and comparative advantage. Suppose two country A and B. They produce two same goods. If the
opportunity cost is lower than comparative advantage is higher and according to that countries can
produce that good to achieve gains from trade.

Question 2: An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60
minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75
minutes. Each country has 4,500 minutes available as the only resource.

a. Who has the absolute advantage in coffee? Explain within 25 words. {2 marks }

Answer :For producing coffee, Brazil produces one ounce in 60 minutes whereas Peru takes 75 minutes.
Hence, Brazil has the absolute advantage in coffee because they are producing coffee with fewer input or
less time than Peru.

b. Who has the comparative advantage in coffee? Explain within 25 words. {2 marks }

Answer: Peru has the comparative advantage in coffee. Because the opportunity cost of producing one
ounce of coffee for Brazil is 3 ounces of soybeans and opportunity cost of producing one ounce of coffee
for Peru is 1.5 ounces of soybeans. So, opportunity cost is lower means greater comparative advantage.
Hence Peru with the lowest opportunity cost of 1.5 ounces of soybeans has a comparative advantage in
coffee production.

c. If the two countries specialize and trade with each other, who will import coffee? Explain within
25 words. {2 marks }

Answer: Peru has a comparative advantage in coffee production .so it will specialize in coffee production.
While Brazil has a comparative advantage in soya production so it will specialize in soya production. If the
two countries specialize and trade with each other the Brazil would import coffee because its opportunity
cost is higher that means comparative advantage is low.
Question 3: Complete the following table (P and Q are equilibrium price and quantity respectively) {4 marks

No Change in Supply An increase in Supply A decrease in Supply

No Change in Demand P same Q P down P Up
same Q up Q down

An increase in Demand P up P ambiguous P up

Q up Q up Q ambiguous

A decrease in Demand P down P down P ambiguous

Q down Q ambiguous Q down

Question 5: Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that
technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it
was).

Within 50 words for each answer, explain:

a. What happens to the equilibrium price and quantity in each market?

Answer: The equilibrium price in each market will fall and quantity in each market will increase. Because of the
technical advance supply has doubled and this reduces the equilibrium price and increases the equilibrium
quantity.

b. Which product experiences a larger change in price?

Answer: Pharmaceutical drugs will experience a larger change in price. In the market for pharmaceutical drugs
with an inelastic demand the increase in supply leads to a relatively large fall in the price and also not much of an
increase in quantity.

c. Which product experiences a larger change in quantity?

Answer: Computers will experience a larger change in quantity. In the market for computers with an elastic
demand the increase in supply leads to a relatively large increase in quantity and also not so much of fall in price.
d. What happens to total consumer spending on each product? {2.5 marks x 4 = 10 marks }

Answer: The total consumer spending falls in the case of pharmaceutical drugs with inelastic demand. The total
consumer spending increases in the case of computers with elastic demand. As demand for drugs is inelastic, the
percentage increase in quantity will be less than the percentage decrease in price. So total consumer spend will
fall. And also as demand for computer is elastic, the percentage increase in quantity will be greater than the
percentage decrease in price. So total consumer spend will increase.
***