Econ 101-7/2

# Econ 101-7/2

## Econ 101-7/2

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##### Presentation Transcript

1. Econ 101-7/2 Interdependence and the Gains from Trade (continued)

2. Exercise 1 Here are the PPF for Robinson Crusoe and Friday with 12 hours of labor.

3. Questions 1. The opportunity cost of 1 pound of fish for Robinson Crusoe and Friday. 2. The opportunity cost of 1 pound of coconut for Robinson Crusoe and Friday 3. Robinson Crusoe has a comparative advantage in __ and Friday has a comparative advantage in__ 4. Robinson Crusoe has a comparative advantage in __ and Friday has a comparative advantage in__

4. Answer to Exercise 1 1. The opportunity cost of 1 pound of fish for Robinson Crusoe and Friday • 4 pounds of coconuts, 3/2 pounds of coconuts. 2. The opportunity cost of 1 pound of coconut for Robinson Crusoe and Friday • 1/4 pound of fish, 2/3 pound of fish.

5. Answer to Exercise 1 3. Robinson Crusoe has a comparative advantage in coconuts and Friday has a comparative advantage in fish. 4. Robinson Crusoe has a comparative advantage in coconuts and Friday has a comparative advantage in fish.

6. Exercise 2 • George and Martha face these production possibilities frontiers for brownies and cupcakes.

7. Questions • a. If George and Martha choose not to trade and divide their time equally between the production of brownies and cupcakes, how many of each would they be able to consume? • b. Now assume that George and Martha decide to specialize in the good in which they have a comparative advantage and then trade. Who would trade brownies and who would trade cupcakes? • c. If George and Martha decide to trade 60 brownies for 60 cupcakes, how many cupcakes and brownies would each have to consume? • d. How do we know each is better off with trade than acting alone?