ECW1101 (Semester 1, 2018)

Tutorial Test 2 (Week 6)

ONE of the following four questions will be randomly selected and students will be asked to
answer it during tutorials in Week 6. This is a closed-book, closed-note test. Students will have
15 minutes to complete it. The test is worth 5% of the total assessment for this unit (each
question will be graded out of 10 marks but will be converted to 5%). Diagrams and definitions
should be used where applicable. Students MUST go to their allocated tutorial class.

Question 1 (10 marks)

“The wealth of a nation is, in part, derived from its productivity. Since Malawi, one of the
world's poorest countries, is less productive than the United States, it is unlikely for mutually
beneficial international trade to occur.” Discuss.

Note: you should be using the concepts of absolute and comparative advantage (week 2’s
lecture: chapter 3) to explain in detail why you agree or disagree with the above statement.
The best answers should include a numerical example (2-country, 2-good).

Question 2 (10 marks)

Other things being equal, explain the effect each of the following situations will have on the
equilibrium price and quantity of corn if

(a) the price of peas, a substitute in consumption for corn, goes up (please use an
appropriate diagram). [4 marks]

(b) the price of fertiliser used for corn rises (please use an appropriate diagram).
[4 marks]

(c) both events in (a) and (b) happen simultaneously (no diagram required). [2 marks]

Note: for part (a) & (b) - better answers explain the adjustment processes from the initial
equilibrium point to the final equilibrium point in detail. Marks will only be awarded to
diagrams that are well explained (with all the relevant points and curves labelled).

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Question 3 (10 marks)

For each of the following scenarios, decide whether you agree or disagree and explain your
answer.

(a) If the elasticity of demand for cocaine is -0.2 and the government succeeds in reducing
supply substantially. As a result, buyers will now spend lesser on cocaine. [3 marks]

(b) Every Chinese New Year, vendors bring thousands of Chinese red lanterns to Malaysia.
During the last two years, the market has been very competitive; as a result, price has fallen
by 10 percent. If the price elasticity of demand was -1.3, vendors would lose revenues as a
result of the price decline. [3 marks]

(c) Farmers suffer declines in their total revenues when they become more productive as a
group. [4 marks]

Note: It is not compulsory to provide any diagram. If it involves any shift in demand/supply
that changes the equilibrium price and quantity, you may produce the diagram if it helps in
your explanation. However, detailed adjustment process from one equilibrium to another is
not required.

Question 4

(a) Using the midpoint method, compute the elasticity of demand between points A and B.
Is this portion of the curve elastic or inelastic? Interpret your answer with regard to
price and quantity demanded. [2 marks]

(b) Now compute the elasticity of demand between points B and C. Is this portion of the
curve elastic or inelastic? Interpret your answer with regard to price and quantity
demanded. [2 marks]

(c) You have just been hired by a forestry company as a consultant. The company wishes
to know whether increasing or decreasing A-grade log prices will increase revenue.
What information do you need? Suppose you have been given this information, what
would you recommend and why? [6 marks]

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