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1. Suppose a good weather in Cambodia increases 30% of the mango production. How will this affect the equilibrium price of Cambodia mangoes?
Answer: The increase in the mango production in Cambodia is likely to reduce the price of the mango. The reason is the readily available mangoes which will increase the price war in the market. Increase in the production will allow the sellers to reduce the price of the product and the customers will prefer to go to the consumers who are selling at lower price. As per the supply demand concept, the increase in the supply leads to decrease in the product price (barring few exceptions). The graph below shows the relationship more clearly.
2. A politician argues that “bumper harvest can benefit the farmers”, do you agree with this statement? Why or why not?
Answer: The argument that “bumper harvest can benefit the farmers” can be stated as a flawed statement if it is considered that the increase in the supply of the harvest to an unprecedented level will lead to reduction in the price of the product in the market. This will impact the profitability of the customers as there will always be someone in the market who can sell the same product at the low price. The farmers might not be able to sell the product even at the cost that was incurred in producing the harvest.
3. Explain carefully the statement: “increasing production cost has significantly reduced the supply of garment. However, instead of rising price, the market price continues to come down”
Answer: Some of the reasons that can motivate the reduction of the price despite the reduction in the supply are the expectation of the seller, getting out of fashion (as always in garment’s case), and stock clearance sale of previous garments. The expectation of the seller that the price of the garments will fall in the future, they try to sell more of the already manufactured products at lower price.
4.Explain why recent research has found that an important reason why many developing countries experience very low rates of growth is their financial systems are underdeveloped (a condition known as “financial repression”)
Answer: It is evident that the financial systems in the developing countries face challenges and they fail operate effectively. There are two tools used to solve adverse selection and moral hazard problems in credit markets, namely, collateral and restrictive covenants. The lack of proper legal functions within the economy acts as obstacle for the implementation of the two aforementioned important tools. Moreover, the intentional reduced price to benefit the borrowers in the developing countries also keep the growth low.
5. Some economists argue that foreign aid can reduce both the likelihood and the severity of hyperinflation. Explain this argument.
Answer: There are two aspects to this argument. The foreign aid can positively impact the hyperinflation and it can also negatively impact the hyperinflation. Prior to that, it would be appreciable to understand the reasons behind the hyperinflation which are either instant supply shortage of the products or the extensive flow of money within the economy. The foreign aid on one hand can help the manufacturing companies more raw materials and thus meet the demands while gradually reducing the price, on the other hand the flow of foreign aids might increase the flow of money within the economy which will eventually lead to hyperinflation.
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