ECO10004: ECONOMIC PRINCIPLES

WEEK 2_TUTOTIAL QUESTIONS

NGUYEN KIM ANH – Student Id: 103525920

Question 1: Suppose that you own a toilet paper manufacturing company in Victoria.
The demand for toilet paper has just gone through the roof due to panic buying (It’s
“Toilet Paper Apocalypse” all over again!!!).
You just received a new order for 1 million rolls of toilet paper to be completed in 1
month. (I know this is a ridiculous number, but hey, it’s the “Toilet Paper Apocalypse”).
This is in addition to the amount your company would normally produce.
Required:

a. What do you think would be the marginal benefit for your company if you accept
this new order? What would be the marginal cost?

b. How do you decide whether it is the right call to accept this new order or not?

Answer:

a. If the answer yes and accept the new order, the marginal benefit is the
additional money may earn by selling 1 million more rolls of toilet paper.

The marginal cost, on the other hand, is the additional charges your factory
must bear. These expenses are as follows:

Extra pay.

You may need to hire additional employees or ask existing ones to work more
hours.

b. You will only accept the new order if the marginal benefit created by it
exceeds the marginal cost, allowing you to add more profits to your bottom line.

You will not do it if the marginal benefit is less than the marginal cost since the
new order would result in a loss, reducing the overall profit of the firm.
Question 2) In your own words, explain the concept of opportunity cost with at
least one example.

John has decided to move to Melbourne and study full time at Swinburne. The
cost of tuition and textbooks totals to $20,000 a year, and John will have to pay
$10,000 for accommodation. Should John decide not to study, he would have
two other options. He could stay home with his parents (rent free), work for the
family business and earn $40,000 a year. Else he could move to Sydney, work
in a friend’s start-up company and make $50,000. Rent in Sydney will cost him
$15,000.
Required:

Considering all of the above scenarios, what would be the opportunity cost of
John going to university?

The answer:

Case 1: If John does not attend college and instead works for his family's
business

+) Opportunity cost 1: $30,000 + $40,000 = $70,000

Case 2: If John does not attend college and instead works for a friend's firm, but
is still required to pay $15,000 per year or more

+) Opportunity cost 2: $30,000 + $35,000 = $65,000

Question 3) Suppose that Australia can only produce two products: cars and
wheat. The following table shows the different amounts of outputs Australia
can produce. (All numbers below are simplified to make calculations easier).
Cars Wheat
(in tonnes)
1,000 0
500 200
400 240
0 400
Required:

a. Draw the Production Possibility Frontier (PPF) for the economy of Australia

b. Based on data from the above table, what is the opportunity cost of producing
one car in Australia? What is the opportunity cost of producing one tonne of
wheat?
Following the chart.
Move from D -> C : 400 -> 240 decreasing 160 wheat to get 400 cars
-> 400 cars ~ 160 wheat
=> 1 car = 160/400 = 0,4 wheat
->Oc(cars) = 0,4 wheat
In the same way, we have:
1 wheat = 400/160= 2,5 cars
->Oc(wheat) = 2,5 cars.

c. Suppose that there has been a technological breakthrough in the car industry
in Australia. A maximum of 1,500 cars can be now produced. Meanwhile,
things remain the same for wheat production. Draw the new PPF (after the
advancement in technology). Compare between the new PPF and the original
PPF.
 Cars Cars ( after the advancement in
technology )
1,000 1500
500 750
400 600
0 0

Question 4) Using the same amount of resources, Australia and New Zealand
can both produce apples and oranges as shown in the following table, measured
in thousands of tonnes.

AUSTRALIA NEW ZEALAND

Apples Oranges Apples Oranges

12 0 6 0

9 2 3 3

0 8 0 6

Required:

a. Which country has the absolute advantage in producing apples? Which

country has the absolute advantage in producing oranges?
The answer:
In the instance of apples, while comparing Australia and New Zealand, we can
observe that Australia produces 12,000 tons of apples whereas New Zealand
produces 8,000 tons. This demonstrates that Australia has the absolute
advantage in producing apples.
Similarly, 8,000 tonnes in favor of Australia and 6,000 tonnes in favor of New
Zealand. Australia continues to have the absolute advantage in producing
oranges.
b. Which country has the comparative advantage in producing apples?
Support your answer with appropriate calculations.
The answer:
In Australia, the opportunity cost of producing 1 apple is 8/12~ 0.67 (2/3)
orange.
In New Zealand, the opportunity cost of producing 1 apple is 6/6 = 1 orange.
Since the opportunity cost of producing apples is lower in Australia, Australia
holds the comparative advantage in producing apples. ( 0.67 < 1)c. Which
country has the comparative advantage in producing oranges? Support your
answer with appropriate calculations.
The answer:
We have opportunity cost oranges (AU)= 12/8 = 3/2 = 1.5 apples, which is
equivalent to part b.
Orange opportunity cost (NZ) = 6/6 = 1 apple => In the production of oranges,
New Zealand has a comparative advantage.

d. Suppose that Australia and New Zealand would specialise (i.e. one country
focuses on producing only one product), then trade with each other. Which
country should produce apples? Which country should produce oranges?

The answer:

Decisions on specialization and trade should be made on the basis of

comparative advantage, not absolute advantage.

Because Australia has a competitive advantage in growing apples, Australia

should focus only on producing apples.

Because New Zealand has a comparative advantage in producing oranges, the

country should focus only on producing oranges.

The two countries can then do commerce with one another.

END.