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Part 1 (5 marks in total) Assume the following: Brad and Jenny both produce food and dishes; Constant opportunity costs; Brad can produce 100 tonnes
Part 1 (5 marks in total) Assume the following: Brad and Jenny both produce food and dishes; Constant opportunity costs; Brad can produce 100 tonnes of food or 100 tonnes of dishes; Jenny can produce 400 tonnes of food or 200 tonnes dishes; In autarky (i.e. self-sufficiency without trade) each person produces both goods and that the optimal mix before trade for Brad is (80) tonnes of food and (20) tonnes of dishes. For Jenny, the optimal mix before trade is (300) tonnes of food and (50) tonnes of dishes. a) What is the opportunity cost of 1 tonne of food for Brad? What is the opportunity cost of 1 tonne of dishes for Brad? What is the opportunity cost of 1 tonne of food for Jenny? What is the opportunity cost of 1 tonne of dishes for Jenny? (2 marks) b) Which person has a comparative advantage in food and which person has a comparative advantage in dishes? (1 mark) c) What are the minimum terms of trade that each person would be willing to accept in order to trade? (2 marks) END AACSB monash.edu/ business-economics EQUIS AMBA ACCREDITED ACCREDITED ABN 12 377 614 012 CRICOS Provider No. 00008CPart 2 (5 marks in total) Assume the following: Consider Jenny's demand function for apples: Qa = 10 - Pa + 2Pp + Y Where, Qa = quantity of apples Jenny demands Pa = price of apples that Jenny faces Pp = price of pears Y = Jenny's income Consider initially that Pp= $1 and Yo = $10 Use the information above to answer the following questions: a) Draw Jenny's demand function for apples (1 mark) b) Show how this demand function for apples changes if Pp increase to $2 but Y falls to $8 at the same time. Show workings (2 marks) c) Using the initial price of pears (Pp) of $1 and a price of apples (Pa) of $1, and applying the change in income from $10 to $8 - are apples a normal or an inferior good for Jenny (use the midpoint formula)? Show workings (2 marks)
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