ECON ASSIGNMENT 1

Assignment 1
Perspective of Economics Econ 1010C/I

1. Suppose that in a year, an American producer can produce 150 T-shirts or 250
phones, while a Chinese producer can produce 300 T-shirts or 100 phones.
a. Graph the production possibilities curve for the two countries. Which country
has the absolute advantage in the production of each good? Which country has
the comparative advantage?
b. Assume that each country decides to use half of its resources in the production
of each good. Show these points on the graphs for each country as point A.
c. Now suppose that each country decides to specialize in the good in which each
has a comparative advantage. Which country should export T-shirts? By
specializing, what is the total world production of each product now?
d. The price of phones can be expressed in terms of T-shirts. What is the highest
price at which phones can be traded that would make both producers better off?
What is the lowest price? Explain.

2. Suppose a person needs to eat bread every day, and his utility function of bread is
in the form of

a. Compute this person's utility level and complete the form below
pieces of bread
Utility
0
5
1
6
2

3

4


b. Now let's consider the problem at the margin. Define marginal utility as the
utility gained from a unit increase in the consumption of bread. Compute the
marginal utility at each level and complete the "marginal utility" column in the form.
pieces of bread
Marginal utility
0
0
1
1
2

3

4


c. Suppose we change the utility function from to

Where,

The price of bread is $0.5 each, then, will this person buy 3 piece of bread?
What about 4 pieces? Why? What about 5 pieces?

d. Is the marginal utility increasing or decreasing? Try to explain why it has this
trend and give some other examples.

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3.
a. Suppose that the price of drinks in CUHK is determined by market forces.
Given the table below, graph the demand and supply curves for drinks. Make
certain to label the equilibrium price and equilibrium quantity.
Price
Quantity Demanded
Quantity Supplied
Per Month
Per Month
$5
6,000
10,000
$4
8,000
8,000
$3
10,000
6,000
$2
12,000
4,000
$1
14,000
2,000

b. Represent the demand and supply curve by equations.

What are the equilibrium price and quantity of drinks? (Compute by equations
and compare it to the result from a.)
c. Suppose the price is currently $5. What problem would exist in the market?
What would you expect to happen to price? Show this on your graph.


4. Using supply-and-demand diagrams, show the effect of the following events on
the market for cars:
a. The price of iron decreases this year.
b. The price of oil increases because it's non-renewable resource.
c. The traffic jam is becoming more and more annoying, and the government
reduced the price of the public transportation.
d. Real incomes grow and new cars are normal goods.


5. Suppose that two different groups of people (teenagers and adults) have the
following demand for cigarettes:
Price
Quantity Demanded
Quantity Demanded

(teenagers)
(adults)
$2
13 per week
20 per week
$4
9
18
$6
5
16
$8
1
14
a. Use the midpoint method to calculate each group's price elasticity of demand as
the price of cigarettes increases from $4 to $6.
b. Why might teenagers have a different elasticity from adults?

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