Instructions:

Please complete Q1 to Q4 FOUR SAQ questions, totaling 80 marks, Q5 is for practice only!

Late submission will receive a deduction in total marks!

This is an individual assignment. You are expected to complete it on your own without copying the work from other student(s) and without allowing other student(s) to copy your work.

Students canNOT use Generative AI tools in this assignment.

Please observe UIC’s academic honesty policy. Plagiarized work will receive zero mark.

Question 1 (Total 20 marks)   

Answer the following questions:

a.   (8 marks) Your hard work was rewarded by a bonus payment of RMB 7000 from your employer. You decided to spend the entire RMB 7000 on buying a new Huawei cellphone although you have a less preferred option of going to Guangzhou for a short trip by spending RMB 5000. Is there an actual (explicit) cost of getting the Huawei phone? What is the opportunity cost concerned – RMB 0, RMB 5000 or RMB 7000? Explain your answer. [Hint: By explicit cost, consider if any money comes from your own pocket]

b.   (4 marks) If the decision to buy the cellphone remains valid, but there has been no bonus payment and you have to pay for the phone with your own money. Will the opportunity cost be different from your answer in part a.? Explain.

c.   (8 marks) You made a RMB  1000 deposit in your Piggy bank on getting a new iPhone priced at RMB 9000 (i.e. RMB 8000 has yet to be paid to get the phone) which you thought was totally worth it. Before completing the transaction, you came to realize that a new Huawei cellphone with unique satellite call function is in the market, making the iPhone now worth only RMB 6000 to you (still priced at RMB 9000). By thinking at the margin, indicate whether you will pay the money due and get the iPhone or just give up the option of purchasing it. Explain your argument. [Hint: Consider marginally or additionally the cost and benefit of taking an action – to buy the iPhone]

Question 2 (Total 20 marks)   

Mark has an income of $500 per month, and he spends it on two goods, apples and bananas. Both Country M where Mark lives and Country Y can produce apples and bananas. Country M can produce 80 tons of apples or  120 tons of bananas, while

Country Y can produce 100 tons of apples or 200 tons of bananas.

a.   (4 marks) Without trade, Country M produces 30 tons of apples, and Country Y  produces 40 tons of apples. The price of a kilo of apple is $10, and the price of a kilo of banana is $5 in country M. If Mark allocates his entire income on apples, how many kilos of apples he can afford? And if Mark allocates his entire income  on bananas, how many kilos of bananas he can afford?

b.   (6 marks) Calculate the opportunity cost of producing oneton of apples in each country. Which country has comparative advantage in the production of apples? Which country has comparative advantage in the production of bananas?

c.   (8 marks) Now suppose the Country M is considering trading 20 tons of apples with Country Y for 10 tons of bananas. Calculate the new levels of apples and bananas in country M. Suppose the price of apples and bananas in Country M is determined by  P(A) = 300/A  and  P(B) = 375/B, where A and B are the unit tons of apples and bananas. Again, if Mark allocates his entire income on apples, how many kilos of apples he can afford? And if Mark allocates his entire income on bananas, how many kilos of bananas he can afford?

d.   (2 marks) Do you think trade can benefit everyone? Does Mark benefit from the trade described above? If yes, explain why. If no, please give suggestions on how Mark can benefit from the trade or not at all.

Question 3 (Total 20 marks)   

Suppose that the supply schedule for chocolate chip cookie is as follows:

Suppose that this chocolate chip cookie can be sold only in the U.S. The U.S. demand schedule for chocolate chip cookie is as follows:

a.    (4 marks) Draw the demand curve and the supply curve for chocolate chip cookie. What are the equilibrium price and quantity of chocolate chip cookie?

b.    (3 marks) Currently some American customers were grumbling the high price of chocolate chip cookies. One customer argued, “It just isn’t worth $15 to buy a bag of chocolate chip cookie. No one should have to pay that much for chocolate chip cookie.” Assume this is a competitive market, and the chocolate chip cookies were sold out supermarkets around the country at an average price of $15. How would you evaluate the arguments that prices of chocolate chip cookies are too high?

c.    (3  marks)  Suppose  that due to those  chocolate chip cookie protests, prices of chocolate chip cookies were lowered to $10. In what sense is this price too low, and how does the price adjust?

Now suppose that chocolate chip cookie can be sold in France. The French demand schedule for chocolate chip cookie is as follows:

d.    (4 marks) What is the demand schedule for chocolate chip cookie now that French consumers can also buy them? Draw a supply and demand diagram that illustrates the new equilibrium price and quantity of chocolate chip cookie. What will happen to the price at which seller can sell chocolate chip cookie? What will happen to the price paid byU.S. consumers? What will happen to the quantity consumed byU.S. consumers?

Now use the supply-and-demand diagrams, show the effect of the following events on the market for chocolate chip cookies.

e.    (3 marks) If a virus destroys chocolate crops and the quantity of chocolate chip cookie produced decreases.

f.    (3 marks) Customers in French consider chocolate chip cookie an inferior good.   This month, they are greeted with bad news as the government cuts their stipends by 15%.

Question 4 (Total 20 marks)   

Coffee and tea are substitutes. Suppose a typhoon destroys half the tea trees of a country, but does not impact the supply of coffee since coffee is imported from a foreign country.

a.    (3 marks) What happens to the price and quantity of tea? Use a labeled diagram to answer the question.

b.    (3  marks)  Suppose  the  price  of tea  rises  from  RMB200  Yuan  per  pound  to RMB300 Yuan per pound, and consumers’ purchases of tea reduced from 100,000 pounds to 80,000 pounds. Calculate the price elasticity of demand of tea (using the midpoint method).