M.SC.

MARITIME OPERATIONAL MANAGEMENT

THE UNIVERSITY OF TRINIDAD AND TOBAGO

Port Economics and Maritime Logistics

COURSE CODE: SEML 5001
INSTRUCTOR:
ASSIGNMENT: Assignment 1
STUDENT NAME: Anika Audit
STUDENT #:
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1. Interdependence and Gains from Trade: Chapter 3, page 61, question 2.

Question 2. American and Japanese workers can each produce four cars a year. An American
worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of
grain a year. To keep things simple, assume that each country has 100 million workers.

Question 2a

 Panel (a.1) shows the production opportunities available to America and Japan

Production Opportunities

Amount produced by 1 worker per Amount Produced with 100 million

year workers per year
Cars Grain Cars Grain

America 4 car/ worker 10ton/worker 400million 1000 million tons

Japan 4 car/ worker 5ton/worker 400million 500 million tons

Question 2b

 Panel a2 shows the combination of cars and grains that America can produce
 Panel a3 shows the combination of cars and grains that Japan can produce
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 Both production possibilities frontiers are derived assuming that America and Japan each utilize
100 million workers. If there is no trade, each person’s production possibilities frontier is also his
or her consumption possibilities frontier.

Question 2 c

Opportunity Cost of Cars and Grains

Opportunity Cost
1 Car 1 ton Grain

America 2 1/2 tons grain 2/5 car

Japan 1 1/4 tons grain 4/5 car

 The table above shows that for America the opportunity cost for producing 1 car is 2 ½ ton of
grain, while Japan’s opportunity cost for the same car is 1 ¼ tons of grain.
 Inversely, America’s opportunity cost for producing 1 ton of grain is 2/5 of a car while Japan is
4/5.

Question 2 d

Absolute Advantage

 Since both countries has the same output per worker for the production of cars, neither country
has an absolute advantage in producing cars.
 However, America has an absolute advantage in producing grain, since it produces more grain per
worker

Question 2 e

Comparative advantage (see Opportunity Cost table)

 The table shows that for America the opportunity cost for producing 1 car is 2 ½ tons of grain,
while Japan’s opportunity cost for the same car is 1 ¼ tons of grain. The opportunity cost for
producing cars is less for Japan. Therefore, Japan has the comparative advantage in producing
cars.
 Inversely, America’s opportunity cost for producing 1 ton of grain is 2/5 of a car while Japan is
4/5. America has the lower opportunity cost of producing grain. Therefore, America has the
comparative advantage in producing grain
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Question 2 f

 Without trade, (see fig a2 point A above) America will produce 200million cars and 500millions
tons of grain.
 Japan will produce the equal amount of cars as America (see fig a3 point B above), however, they
will only produce 250 million tons of grain.

Question 2 g

How Trade Expands the Set of Consumption Opportunities

Trade can benefit everyone in society because it allows people to specialize in activities in which

they have a comparative advantage. The proposed trade between America and Japan offers each

of them a combination of cars and grain that would not have been possible without trade.

 In panel 1 below, America gets to consume at A 1 rather than at point A. Giving an increase
in consumption of +20 million cars and +100 million tons of grain. See table 2 below
 At point C Americas still produced both cars and grain, however prominence were given to
the production of grain because they had comparative advantage over cars
 In panel 2 below, Japan gets to consume at B 1 rather than at point B. Given an increase in
consumption of +20 million cars and +50 million tons of grain. See table 2 below
 At point C Japan opted to specialize in the production of cars, since they have comparative
advantage in this area
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Table 2: The gains from trade: Summary

America Japan
Cars Grain Cars Grain
millions millions millions millions
Without Trade
Production and Consumption 200 500 200 250
With Trade
Production 40 900 400 0
Trade Gets 180 Gives 300 Gives 180 Gets 300
Consumption 220 600 220 300
Gains From Trade
Increase in Consumption +20 +100 +20 +50

2. Market Forces of Supply & Demand: Chap. 4, pg 85, ques. 1, 3 & 13.

Question 1
Explain each of the following statements using supply-and-demand diagrams.
“When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the
country.”
 Due to the cold snap many oranges fields was destroyed
 This reduced the quantity of oranges produced there by reducing the supply of oranges
 At the same price, there will be fewer oranges, which will shift the supply curve inward at S2
 Figure 1 shows, this decrease in supply from S1 to S2. This shift will also raises the equilibrium
price and the equilibrium quantity falls
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 “When the weather turns warm in New England every summer, the price of hotel rooms in
Caribbean resorts plummets.”
 Due to the warm, weather in England the demand for hotels in the Caribbean decreases shifting
the demand curve to the left (see fig below) from D1 to D2
 The equilibrium price and equilibrium quantity will decrease
 The shift in demand curve causes the equilibrium price at P1 to reduce to P2, in addition
 The equilibrium quantity will also be reduced from Q1 to Q2

c. “When a war breaks out in the Middle East, the price of gasoline rises, and the price of a used
Cadillac falls.”
 Due to the war, the production of oil will be affected, reducing the supply of gasoline.
 The reduction in gasoline will shift the supply curve to the left from S1 to S2
 This left shift in supply causes the equilibrium price and equilibrium quantity to increase
 This increase results in higher price of gasoline from P1 to P2
 The quantity of gasoline being sold will also be reduced from Q1 to Q2
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 Its general knowledge that old vehicles consumes more gasoline: therefore, observing that the
price of gasoline has increased.
 The demand for used Cadillacs will shift from D1 to D2
 The left shift the demand curve will causes the equilibrium price and equilibrium quantity to
decrease
 Due to the reduction demand for Cadillac’s the price of same will fall from P1 to P2
 Note, gasoline and vehicles are called complements because a change in the price of gasoline
will affect the demand for vehicles.

Question 3

3. Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also, indicate whether demand or supply increases
or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.

a. People decide to have more children.

 A larger family will need a vehicle that can carry more people. Minivans will be a good
choice to satisfy that need.
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 Therefore, this will shift the demand curve to the right from D1 to D2 which indicates an
increase in demand and ultimately may increase prices

b. A strike by steelworkers raises steel prices.

 Increase steel prices will affect the production cost of minivans
 In this example, the manufacturer may determine that due to low profit margins they will supply
less minivans.
 This is reflected by the supply curve shifting to the left from point S1 to S2.

.
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c. Engineers develop new automated machinery for the production of minivans.

 Mechanization in the production of minivans will reduced the labour and time needed in
manufacturing.
 By reducing the overheads cost and increasing the speed the supply of minivans will increase
 This is denoted by the supply curve shift to the right from S1 to S2
 This increase in supply can reduce the price of minivans

d. The price of sports utility vehicles rises.

The increase in prices of SUV’s will have an effect on the demand of minivans. Minivans can be
considered a substitute to SUVs
 According to the law of demand, because both vehicles can satisfy the same need the increase in
price of the SUVs can increase the demand for the minivan because it is a substitute
 This can be reflected as a right shift in the demand curve from point D1 to D2
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e. A stock-market crash lowers people’s wealth.

 A lower income will most likely mean less money to spend. This will affect consumers buying
power
 Consumer demand for minivans will likely decrease and any good with a reduce demand are
referred to as normal goods.
 In this case there will be shift in the demand to the left from point D1 to D2

Question 13

a. Demand and Supply Curve

The supply schedule of tickets is reflected on the supply curve with a vertical line. A vertical
supply curve is indicative of perfectly inelastic supply curve. Simply put, the same quantity of
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tickets is available at all price points, it does not matter how much patrons are willing to pay. For
example, there is a demand for 10,000 tickets at the price of $4, but only 8,000. No additional
tickets can be generated. Inversely, at the price of $20, there is still 8,000 tickets available.
Therefore, a change in the price has no effect on the quantity supplied

b. The equilibrium price is $8 and quantity of tickets is 8000 tickets

c. The new equilibrium price is $12 at 8000 tickets
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3. Elasticity and its Application: Chapter 5, page 108, questions 2 and 9.

Question 2

a, For business travelers, the price elasticity of demand when the price of tickets rises from $200

to $250: Formula

(1900−2000)÷[(1900+2000)÷2] −0.051
= (200−250)÷[(200+250)÷2]
= = 0.229
0.222

For vacationers, the price elasticity of demand when the price of tickets rises from $200 to $250=

(600−800)÷[(600+800)÷2] −0.285
(250−200)÷[(250+200)÷2]
= = 1.283
0.222

b, Answer: the price elasticity of demand for vacationers is higher than the elasticity for business
travelers because vacationers can opt for different mode of transportation or substitutes for
traveling. For example, they may decide to use transit flights or use trains or even drive because
speed of travel is not a priority. For most business travelers speed may be paramount because of
their schedules.

Question 9

a, Use these data to estimate the price elasticity of demand for subway rides.

Four Million Fewer riders = 4.3% decline

P1 = 1.25; P2 = 1.50

(4.3 ÷100)
Price elasticity of demand=
(1.50−1.25)÷[(1.50+1.25)÷2]
= 0.2365
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b, According to your estimate, what happens to the Transit Authority’s revenue when the fare
rises? Answer: The price elasticity of demand is lower than 1 (0.2365) this suggest that subway
rides are inelastic. Therefore, an increase in price will increase profit significantly.

c, Why might your estimate of the elasticity be unreliable?

There are a number of variables that are not considered when calculating elasticity. In this example
other factor that may influence demand may include but not limited to;

 Travelers income
 Increase or decrease demand for subway traveling
 Uncontrollable variables like the weather condition or crises influencing demand

4. Measuring a Nation’s Income: Chapter 23, page 510, questions 1, 4, 8 and

11.
Question 1. What components of GDP (if any) would each of the following transactions affect?

a. A family buys a new refrigerator.

The transaction of a new fridge will contribute to the consumption component of GDP
Consumption is expenditure on goods and services by the households. Goods include both the
durable and non durable goods. Eg of durable goods are fridges and non durable goods are food
and clothing services are those which are physically visible but can be felt such as intangible items
such as the medical care and education.

b. Aunt Jane buys a new house.

Buying a new house contributes to the investment component of GDP Investment is spending
money on a purchase of capital equipment, inventories and structures. Other factors that can
influence GDP in home purchase include, broker fees, closing cost, home inspection, appraisal,
construction cost etc. In addition, if it were a newly constructed home then the gain retained on
the sale of the house would be included in GDP.

Ford sells a Mustang from its inventory.

Changes the consumption and investment components of the GDP However as the change in
transaction of money is exactly equal and opposite for both of these GDP components there will
not be any change in GDP in fact when ford produces the car and instead of selling it complements
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it to its inventory ford is supposed to have purchased the car for personal use. That is the car is
treated as part of fords investment spending. However when ford sells the car out of the inventory
ford’s inventory investment is negative counterbalancing the positive expenditure of the buyer.

d. You buy a pizza.

Contributes to the consumption component of GDP.

Same as fridge.

e. California repaves Highway 101.

The construction of a highway is a government purchase, therefore government purchase is a

component of the GDP increases. Government purchases is the spending on goods and services by
local state and federal governments

f. Your parents buy a bottle of French wine.

This has an impact on both the consumption and net exports components of the GDP. Buying
French wine by my parents is consumption expenditure, however French wine has to be imported.
There for an import of French wine decreases the net exports component of the GDP.

A purchas of French wine increases consumption component and decreases the net export
component of the GDP

g. Honda expands its factory in Marysville, Ohio.

This increases investment and thus increases GDP Investment is the process of investing on
purchase of goods that are used for the manufacturing of more goods and services in the future. It
is an investment for the future. Purchase of capital equipment, inventories and structures together
gives us the total investment. Therefor the factory built in Ohio is investment expenditure, and
causes an increase in GDP.

Question 4

a. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2010 as the base
year:
Nominal GDP
 2010: ($1/qt milk x 100) + ($2/qt honey x 50) = $200
 2011: ($1/qt milk x 200) + ($2/qt honey x 100) = $400
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 2012: ($2/qt milk x 200) + ($4/qt honey x 100) = $800

Real GDP noting base year 2010
 2010: ($1/qt milk x 100) + ($2/qt honey x 50) = $200
 2011: ($1/qt milk x 200) + ($2/qt honey x 100) = $400
 2012: ($1/qt milk x 200) + ($2/qt honey x 100) = $400
GDP deflator
 2010: ($200÷$200) x 100 = 100
 2011: ($400÷$400) x 100 = 100
 2012: ($800÷$400) x 100 = 200

b, Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2011 and

2012 from the preceding year. For each year, identify the variable that does not change

% change in nominal GDP

 2011: [($400-200)÷ 200] x 100% =100%
 2012: [($800-400)÷ 400] x 100% =100%
% change in real GDP
 2011: [($400-200)÷ 200] x 100% =100%
 2012: [($400-400)÷ 400] x 100% =0%
% change in GDP deflator
 2011: [($100-100)÷ 100] x 100% =0%
 2012: [($200-100)÷ 100] x 100% =1000%
The answer makes sense because outputs from 2011 and 2012 remained the same that’s why the

real GDP is Zero. Additionally prices for milk and honey did not change from 2010 to 2011, that’s

why the percent change GDP deflator reflected zero.

c, Did economic well-being rise more in 2011 or 2012?

Although prices rose 2012, there were no change in real GDP. However, there was a rise in real

GDP in 2011. Therefore, economic wellbeing increased more in 2011.

Question 8
a, Each person’s value-added (VA) equals the value of what he/she produced minus the value of
the intermediate inputs he/she started with.
 Farmer’s VA = $100
 Miller’s VA = $50
 Baker’s VA = $30
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 GDP = $180
Note that GDP = value of final good = sum of value-added at all stages of production.

b, Value added is defined as the value of a producer’s output minus the value of the intermediate
goods that the producer buys to make the output. Assuming there are no intermediate goods beyond
those described above, calculate the value added of each of the three producers.

 Farmer’s VA = $100
 Miller’s VA = $50
 Baker’s VA = $30

Question 11

a. Gross domestic product is equal to total income Barry collects = $400

b. Net National Product (NNP) = (GDP – Depreciation) = 400-50 = $350
c. National Income (NI) = NNP – Sales Taxes = 350 - 30 = $320
d. Personal Income (PI) = NI- Retained Earnings = 320 - 100 = $220
e. Disposable Personal Income = PI – PI tax = – 220-70 = $150