Zainab's Weekly Budget Of 48: What Does She Spend?

Q1 Zainab Has A Weekly Budget Of 48 Which She Likes To Spend On Mag

Choose the following questions which are based on Zainab's weekly budget scenario:

Q1: Zainab has a weekly budget of $48, which she likes to spend on magazines and pies. [1 Mark]

• A) If the price of a magazine is $8 each, what is the maximum number of magazines she could buy in a week?
• B) If the price of a pie is $24, what is the maximum number of pies she could buy in a week?
• C) Draw Zainab’s budget constraint with pies on the horizontal axis and magazines on the vertical axis. What is the slope of the budget constraint?
• D) What is Zainab’s opportunity cost of purchasing a pie?

Q2: Many of the goods that China’s citizens enjoy are produced abroad, and many goods produced in China are sold abroad. When goods are produced abroad and sold domestically, it is called import, and when goods are produced domestically and sold abroad, it 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. [2 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 the two countries trade with each other, trading 2 Kgs of soybeans for 1 Kg of coffee. Explain why both countries will benefit from this trade.

Q3: Illustrates the interaction (equilibrium point) of demand and supply in the market for petrol based on the table below. Explain the following conditions. [2 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 million gallons?

Paper For Above instruction

Question 1: Budget Constraint and Opportunity Cost

Zainab has a weekly budget of $48 allocated for purchasing magazines and pies. Her consumption choices can be visualized through a budget constraint, which demonstrates the trade-offs between the two goods given their prices and her income level. We analyze her purchasing power for magazines and pies based on their unit prices and explore the economic concepts of marginal opportunity cost and budget line slope.

(A) Maximum Magazines She Can Buy

The price of one magazine is $8. To find the maximum number of magazines Zainab can purchase, we divide her total budget by the price per magazine:

Max magazines = $48 ÷ $8 = 6 magazines.

(B) Maximum Pies She Can Buy

The price of one pie is $24. Similarly, dividing her total budget by the price per pie gives:

Max pies = $48 ÷ $24 = 2 pies.

(C) Drawing the Budget Constraint and Finding the Slope

The budget constraint can be mapped with pies on the horizontal axis (x-axis) and magazines on the vertical axis (y-axis). The maximum number of pies she can buy when magazines are zero is 2, and the maximum magazines when pies are zero is 6. The straight-line equation representing her budget constraint can be written as:

8M + 24P = 48,

where M = number of magazines, P = number of pies.

Rearranged, the constraint becomes:

M = 6 - (3/8) P.

The slope of the budget constraint is the negative of the ratio of the prices, which is:

Slope = - (Price of pies / Price of magazines) = - (24 / 8) = -3.

(D) Opportunity Cost of Purchasing a Pie

The opportunity cost of buying one pie is measured in terms of magazines foregone. Since each pie costs her $24, and each magazine costs $8, the opportunity cost in magazines is:

Opportunity cost of 1 pie = (Price of pie) / (Price of magazine) = $24 / $8 = 3 magazines.

This means that by purchasing one pie, Zainab sacrifices the chance to buy 3 magazines.

Question 2: Comparative Advantage and Trade

In analyzing international trade, understanding absolute and comparative advantages is essential. Here, the productivity rates of Chinese and Paraguayan workers in producing soybeans and coffee provide the basis for determining which country should specialize in each good and the gains from trade.

(A) Absolute Advantage in Coffee

Absolute advantage is determined by the ability to produce more output in the same amount of time. For coffee:

• China: 1 kg in 120 min
• Paraguay: 1 kg in 150 min

Since Chinese workers produce coffee faster (120 min vs. 150 min), China has the absolute advantage in coffee production.

(B) Which Country Should Produce Coffee?

Comparative advantage considers opportunity costs. China, with a lower time per unit for coffee, should produce coffee, as it sacrifices fewer resources relative to its production of other goods (soybeans). Paraguay, being relatively less efficient, should focus on other goods like soybeans.

(C) Which Country Will Import Coffee?

The country with the higher opportunity cost of producing coffee should import it. Given China’s lower opportunity cost in coffee (since it produces coffee more efficiently), Paraguay would import coffee from China, benefiting from specialization and trade.

(D) Benefits of Trade with a 2 Kgs Soybeans to 1 Kg Coffee Exchange

Both countries benefit when they specialize based on comparative advantage and trade. Paraguay trades 2 kg of soybeans for 1 kg of coffee, which makes both better off than if they attempted self-sufficiency. Paraguay obtains coffee at a lower effective cost, while China receives soybeans they might not produce as efficiently, leading to increased consumption and resource efficiency for both.

Question 3: Market Equilibrium and Price Capping

The market for petrol involves the interaction of supply and demand curves. The equilibrium point is where the quantity supplied equals the quantity demanded. Excess supply (surplus) occurs when the quantity supplied exceeds demand at a given price, while excess demand (shortage) occurs when demand exceeds supply.

(A) Excess Supply and Demand Illustration

In the market graph, plot the supply curve and demand curve intersecting at the equilibrium point. A surplus appears when the price is above equilibrium, resulting in a greater quantity supplied than demanded. Conversely, a shortage occurs when the price is below equilibrium, leading to higher demand than supply.

At a price above equilibrium, excess supply (surplus) is visible, whereas at a lower price, excess demand (shortage) occurs.

(B) Impact of Price Cap at $1.30 per Gallon

If the government caps petrol prices at $1.30 per gallon, and at this price the quantity supplied is 575 million gallons, but the quantity demanded is higher, a shortage will develop. The lower price discourages producers from supplying enough petrol while increasing consumers' demand, leading to potential rationing or black markets. The market cannot clear at this capped price, and shortages persist unless adjustments are made.

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