College of Administrative and Financial Sciences

Assignment-1
Deadline: 20/07/2022 @ 23:59

Course Name: Macroeconomics Student’s Name: Mohammed Alotaibi

Course Code: ECON201 Student’s ID Number: S200080971
Semester: I CRN: 50209
Academic Year: 1442/1443 H

For Instructor’s Use only

Instructor’s Name:
Students’ Grade: / 15 Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY

 The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
 Assignments submitted through email will not be accepted.
 Students are advised to make their work clear and well presented, marks may be reduced for
poor presentation. This includes filling your information on the cover page.
 Students must mention question number clearly in their answer.
 Late submission will NOT be accepted.
 Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
 All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
 Submissions without this cover page will NOT be accepted.
 Assignment 1 Question-Chapters: 1, 2, 3 & 4: - [15 Marks]
Q1: Jamal’s weekly budget is $48, which he spends on magazines and pies. [4 Mark]
A) If the price of a magazine is $8 each, what is the maximum number of magazines he could
buy in a week?
B) If the price of a pie is $24, what is the maximum number of pies he could buy weekly?
C) Draw Jamal’s budget constraint with pies on the horizontal axis and magazines on the vertical
axis. Draw the slope of the budget constraint?
D) What is Jamal’s opportunity cost of purchasing a pie?

Answer Q1 – A:

Total budget / price of magazine = ($48 / $8) = 6 magazines

Answer Q1 – B:

Total budget / price of pie = ($48 / $24) = 2 pies

Answer Q1 – C:

The slope of the graph is (-3x)

Jamal’s budget constraint

7

4
Magazines

0
0 0.5 1 1.5 2 2.5
Pies
Answer Q1 – D:

One magazine is $8, while one pie is $24. ($24/$8 = 3)

So, the opportunity cost of purchasing one pie is three magazines.

Q1-Refs: N. Gregory Mankiw - Principles of macroeconomic – 6th edition

https://www.khanacademy.org/economics-finance-domain/microeconomics/choices-opp-cost-tutorial/utility-maximization-with-
indifference-curves/a/how-individuals-make-choices-based-on-their-budget-constraint-cnx

Q2: Many of the goods that China’s Citizens enjoy are produced abroad, and many of the goods
produced in the China are sold abroad. When goods are produced abroad and sold domestically, the
process is called import and when goods are produced domestically and sold abroad, that process is
called export. Suppose an average worker in China can produce one kg of soybeans in 40 minutes
and one Kg of coffee in 120 minutes, while an average worker in Paraguay can produce one kg of
soybeans in 100 minutes and one kg of coffee in 150 minutes. Answer the following questions. [6
Marks]
A) Which country has the absolute advantage in coffee? Explain.
B) Which country should produce coffee? Explain.
C) If the two countries specialize and trade with each other, which country will import coffee?
Explain.
D) Assume that the two countries trade with each other and the country importing coffee trades 2
Kgs of soybeans for 1 Kg of coffee. Explain why both countries will benefit from this trade.

Answer Q2 – A:

First, let’s draw a production chart that will apply to all following answers.

Type of production China Paraguay

1 kg of Soybeans 40 minutes 100 minutes

1 kg of Coffee 120 minutes 150 minutes

As we know, the “Absolute Advantage” is the ability for a country to produce a good using fewer

inputs than another country. In this chart we see China has absolute advantage over Paraguay in

producing coffee due to less inputs “time” required to produce 1 kg of coffee.

Answer Q2 – B:

To determine which country should produce coffee we must compare their “Comparative

Advantage”, which is the ability to produce a good at lower opportunity cost than another country.

- The opportunity cost of producing 1 kg of coffee in China is (120/40) = 3 Kgs of soybeans.

- The opportunity cost of producing 1 kg coffee in Paraguay is (150/100) = 1.5 Kgs of

soybeans.

So, Paraguay should produce coffee because they have comparative advantage in coffee production

and “sacrificing less soybeans”.

Answer Q2 – C:

As we saw in the previous answer (Q2-B), Paraguay has the comparative advantage over China in

coffee production. Also China has comparative advantage in soybeans production over Paraguay.

So, this indicates that China will import coffee.

Answer Q2 – D:

China is trading soybeans for coffee. Which means that for exporting the total amount of soybeans

production, China will receive half of the amount of coffee.

Also when Paraguay exporting coffee, it will receive double the amount of soybeans.

As we know, “gains from trade arise from comparative advantage”. When each country specializes

in a good that the country has a comparative advantage in producing it, the total production in both

countries is higher, and both can gain from trade.

Q2-Refs: N. Gregory Mankiw - Principles of macroeconomic – 6th edition – chapter 3

https://www.econlib.org/library/Topics/Details/comparativeadvantage.html
https://www.investopedia.com/terms/c/comparativeadvantage.asp
 Q3: Illustrates the interaction (equilibrium point) of demand and supply in the market for petrol
based on the table below. And explain following conditions. [5
Marks]
A) Show excess supply (surplus of petrol) and excess in Demand (shortage of petrol) in the same
graph and explain.
B) Suppose the government decided that, since petrol is a necessity, its price should be legally
capped at $1.30 per gallon. What do you anticipate would be the outcome in the petrol market
if at this price quantity supplied in the market is 575 Millions of gallons?

Price (per gallon in $) Quantity Demanded Quantity Supplied

(millions of gallons) (millions of gallons)

1.00 800 500

1.20 700 550
1.40 600 600
1.60 550 640
1.80 500 680

Answer Q3 – A:

Price and Quantity Equilibrium for gas

Surplus = 180 m gallons

Quantity supplied
$1.80
Price per gallon

$1.60

$1.40 Equilibrium

$1.20
Quantity demanded

Shortage = 150 m gallons

$1.00

500 550 600 640 680 700 800

So, as the graph shows us. The equilibrium price is $1.40 per gallon, while the equilibrium quantity

is 600 million gallons. And, at price $1.80:

- Quantity supplied is 680 million gallons

- Quantity demanded is 500 million gallons

This situation (Qs > Qd) will lead to excess in supply “Surplus” by 180 million gallons.

At price $1.20:

- Quantity supplied is 550 million gallons

- Quantity demanded is 700 million gallons

This situation (Qd > Qs) will lead to excess in demand “shortage” by 150 million gallons.

Answer Q3 – B:

Looking at the numbers in the previous graph shows us that the equilibrium price is $1.40. Which

means that it’s the best price for supplier and consumer.

If the government make the price $1.30 it actually does harm to both supplier and consumer, because

it goes against two of the “principles of economics” which are: “People respond to incentives” and

“Markets are usually a good way to organize activity”, and I will explain how.

When Govt choose $1.30 per gallon, it really reduces the suppliers’ incentives to produce more

gallons because the price declined. Simultaneously, consumers will demand more petrol as prices

goes down. This situation will eventually lead to excess demand as the quantity supplied doesn’t

match the quantity demanded. So, as we see the Govt decision did not help at all, it only causes less

incentives to the supplier to produce, and shortage of important good to the consumer.
If the Govt payed attention to the principle “Markets are usually a good way to organize activity”

it would know that sometimes intervention between supplier and consumer in markets may cause

problems. Markets usually reach middle point “Equilibrium” that satisfies both supplier and

consumer.

Q3-Refs: N. Gregory Mankiw - Principles of macroeconomic – 6th edition – chapter 1,6,7

https://www.economicshelp.org/blog/5735/economics/should-the-government-intervene-in-the-economy/