Opportunity Cost of Producing 1 Commodity Y

Question 1

(a)         For the production of commodity Y, Country P produces 1000 per person, while Country Q produces 1500 per person. For commodity Z, Country P produces 1600 per person, while Country Q produces 2000 per person. In both cases, Country Q owns the absolute advantage in the production of both commodity Y and Z in the same amount of time as Country P.

(b)

* A= Production of commodity Y per person, B= Production of commodity Z per person.

Country Q has a comparative advantage in the production of commodity Y because they produce at a lower opportunity cost which is 1.3 of commodity Z comparing to country P which has to sacrifice 1.6 of commodity Z when producing 1 commodity Y. Therefore, Country Q should focus on producing commodity Y since the opportunity cost is lower.

(c)

* A= Production of commodity Y per person, B= Production of commodity Z per person.

Country P has a comparative advantage in the production of commodity Z because they produce at a lower opportunity cost which is 0.625 of commodity Y comparing to country Q which has to sacrifice 0.75 of commodity Y when producing 1 commodity Z. Therefore, Country P should focus on producing commodity Z since the opportunity cost is lower

Question 2

(a) A change in price causing the demand curve to be downward sloping and supply curve to be upward sloping.  A surplus happens which Qd < Qs. Also, A price fall from P1 to P2 and Qd started to increase and Qs started to decrease until it meets the equilibrium.[pic 5]

(b) Due to hazelnut spread and peanut butter are substitutes for each other, when the price of the hazelnut spread falls, consumer started to demand more for hazelnut spread and causing a fall in demand for peanut butter market which the demand curve of peanut butter will shift from D1 to D2. At the same time causing the price and quantity equilibrium of the peanut butter to fall from A to B. Also, the Qs falls.[pic 6]