Question

Question 5 a Tortilla chips and tomato salsa are a popular snack food combination. Suppose a genetically altered bacteria helps protect tomatoes from frost damage, and the tomato harvest increases. Analyse qualitatively the resulting changes in the prices of tortilla chips and salsa. How does your analysis differ from a partial equilibrium analysis? b. Consider a potential, voluntary exchange between two people assuming that both have complete information about each other's preferences and there are no transaction costs. Ted and Bill have 9 potato chip bags and 15 cans of coke. Initially Ted has 6 potato chip bags and 10 cans of coke, while Bill has 3 potato chip bags and 5 cans of coke. Ted's MRS of potato chip bags for cans of coke is 2, while Bill's MRS is 1/3 i. Is there room for mutually beneficial, voluntary exchange? . Determine which consumer would trade for more potato chip bags and which consumer would trade for more cans of coke c. If the amount of productive resources available for use in an economy were to increase, what would happen to the production possibilities frontier? d. Australia and New Zealand can produce the amounts of avocados and potatoes indicated in the table below with one unit of land. Each country has 10 units of land. Is it possible for the two countries to benefit from trade? Country Australia New Zealand Avocados Tomatoes 100 1,000 50 300

Answer 1

a. Due to an increase in the production of tomatoes, the supply to salsa manufacturing companies increases. Due to an increase in supply, (and since all else remains equal, the demand will remain equal), the equilibrium price of tomatoes will decrease. The cost of salsa will go down, resulting in a decline in prices in combo as well. This will result in an increase in demand (the low prices) of the combo. Due to an increase in demand, the price of tortilla chips will go up to meet the new equilibrium price.

In partial equilibrium analysis, we do not look at the effect one sector has on another sector. For instance, increase in tomato production does not affect chip production in the country.  

b. The Marginal Rate of Substitution (MRS) is defined as the rate at which a consumer is ready to exchange a bag of potato chips for one can of coke at the same level of utility. Ted is willing to exchange 2 cans of coke for one bag of potato chips. While, Bill is willing to exchange 3 bags of potato chips for one can of coke. Ted has 6P 10C and Bill has 3P 5C. We can see that there is room for mutually beneficial voluntary exchange. Ted will trade for more potato chips, since it is more valuable to him (as valuable as 2 cans of coke). While, Bill will trade for more cans of coke, (because one can of coke is worth 3 bags of potato chips to him).

c. An increase in the resources available for production shifts the production possibility frontier outwards, as shown.


d. While Australia has an absolute advantage in producing avocados and tomatoes, we can see that New Zealand has a comparative advantage in producing avocados. 1 avocado will mean 10 tomatoes for Australia, while 1 avocado will mean 6 tomatoes for New Zealand. Comparative advantage is important to keep in mind because it helps us produce a good at the least possible opportunity cost. Hence, there is an advantage in trading between the two countries.

null

Hope this helped!