Section B: Calculating exercise

1. China and India in producing Microwaves and Laptops.

1.1. For China:
OC of microwaves = 30/150 = 0.2 laptops
OC of laptops = 150/30 = 5 microwaves
For India:
OC of microwaves = 50/150 = 1/3 = 0.333 laptops
OC of laptops = 150/50 = 3 microwaves
1.2. In producing microwaves, China has the absolute advantage. Because China’s labor hours
needed to make 1 microwaves is just 30, lower than India with 50 hours.
In producing laptops, both countries have the same amount of labor hours needed to make 1
laptop. Therefore, none of them have the absolute advantage in producing laptops.
1.3. India and China should trade with each other. Because China has a comparative advantage
in producing microwaves, meanwhile India has a comparative advantage in producing laptops.
Therefore, China could focus on producing microwaves and exchanging a portion of its output for
laptops. And reverse with India. Hence, both countries could increase the total amount of output
from microwaves and laptops.
2. England and Spain in producing cheese and bread.
2.1. For England: OC of cheese = ¼ = 0.25 unit of bread
For Spain: OC of cheese = 4/8 = 0.5 unit of bread
2.2. For England: OC of bread = 4/1 = 4 unit of cheese
For Spain: OC of bread = 8/4 = 2 unit of cheese
2.3. In producing cheese, England has the absolute advantage. Because England’s labor hour
needed to make 1 unit of cheese is just 1, fewer than Spain with 4 hours.
In producing bread, England has the absolute advantage. Because England’s labor hours
needed to make 1 unit of bread is just 4, fewer than Spain with 8 hours.
2.4. In producing cheese, England has the comparative advantage. Because England’s
opportunity cost for 1 unit of cheese is just 0.25 unit of bread, fewer than Spain with 0.5 unit of
bread.
In producing bread, Spain has the comparative advantage. Because Spain’s opportunity cost
for 1 unit of bread is just 2 unit of cheese, fewer than England with 4 unit of cheese.
Question 1: What are the tools that the government can use to intervene in the market?
Discuss and give example for each.
1. Price Floors: The government sets a lower limit for prices, ensuring that they do not fall below a
specified level.
- Example: Minimum wages, government set the minimum wages with the purpose of ensuring
rights for labors or to influence the quantity supply of labor.
2. Price Ceilings: The government imposes an upper limit on prices, preventing them from rising
beyond a certain level.
- Example: Bank interest rate, government imposes the maximum interest rate primarily aimed at
protecting consumers, promoting financial stability, and controlling inflation.
3. Taxes:The government applies taxes on individuals and companies.
- Example: Applies taxes on cigarettes aim to reduce smoking and improve public health.
4. Subsidies: The government provides financial assistance to specific industries or products.
- Example: Renewable energy subsidies to promote the use of clean energy.
5. Regulation and Control: The government enforces rules and regulations to guide market
behavior to ensuring product safety and quality, or preventing monopolistic practices
- Example: Environmental regulations on emissions from factories to protect air quality.
6. Buffer Stocks: The government maintains a stockpile of goods (e.g., agricultural products) to
stabilize prices and manage supply.
- Purpose: + Price Stability: To prevent extreme price fluctuations.
+ Income Stability: To support farmers during periods of oversupply or
undersupply.
- Example: The European Union’s Common Agricultural Policy (CAP) uses buffer stocks to
stabilize prices of agricultural products.
Question 2: What is the difference between a “change in demand” and a “change in quantity
demanded”? Graph your answer.
- Change in demand refers to a shift in the entire demand curve, caused by factors other than the
price of the good or service.
- Change in quantity demanded refers to amount of a good or service that buyers are willing and
able to purchase movement along the demand curve, caused by a change in the price of the good or
service.
Change in demand Change in quantity damanded
D1 D2

Q1
Q2

Suppose the number of buyers increases.
Then, at each P, Qd will increase.
The demand curve shifts to the right (D1 to D2).
Question 3:
Cause change in quantity demanded
Change in price
Suppose the price fall from $4 to $3.
Then the quantity demanded will increase 3 units (from 13 to
15)
Cause change in demand
Change in the price of a related good
Change in taste
Change in the number of buyers
Change in consumer expectations
Change in income