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Chapter 2 Comparative Advantage Q. 1, 3, 5, 7. Q. 9 Please see under “Answers” from the tutorial weekly schedule. Problem #1, Chapter 2 .

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chapter 2 comparative advantage q 1 3 5 7
Chapter 2Comparative AdvantageQ. 1, 3, 5, 7

Q. 9 Please see under “Answers” from the tutorial weekly schedule

problem 1 chapter 2
Problem #1, Chapter 2
  • Ted can wax 4 cars per day or wash 12 cars. Tom can wax 3 cars per day or wash 6. What is each man’s opportunity cost of washing a car? Who has comparative advantage in washing cars?
solution to problem 1 1
Solution to problem #1 (1)
  • Both Ted and Tom have two options to choose from: waxing cars or washing cars
  • If one chooses to wax (wash) cars, one will have to forgo washing (waxing) cars
  • Opportunity Cost
    • The value of your next best alternative that you must forgo in order to engage in your current activities
solution to problem 1 2
Solution to problem #1 (2)

Ted

  • If Ted chooses to wash a car, he will have to forgo having 1/3 car waxed
  • The 1/3 car wax forgone is actually his opportunity cost of having a car wash
  • Opportunity cost = relative efficiency of two activities
    • Units of forgone activity you can do in a given amount of time/ Units of current activity you can do in a same given amount of time
solution to problem 1 3
Solution to problem #1 (3)
  • Applying the above formula, we can also compute Ted’s opportunity cost of waxing a car
    • 12 units of car wash forgone in an hour / 4 units of car wax can be performed in an hour
    • Ted’s opportunity cost of waxing a car is 3 units of car wash

Tom

  • Similarly, Tom’s opportunity cost of washing a car is
    • 3 units of car wax forgone in an hour/ 6 units of car wash can be performed in an hour
    • Tom’s opportunity cost of washing a car is 0.5 unit of car wax
solution to problem 1 4
Solution to problem #1 (4)
  • We can also compute Tom’s opportunity cost of waxing a car using the formula discussed
    • 6 units of car wash forgone in an hour / 3 units of car wax can be done in an hour
    • Tom’s opportunity cost of waxing a car is 2 units of car wash
  • Who has a comparative advantage in washing cars?
solution to problem 1 5
Solution to problem #1 (5)
  • Comparative advantage
    • Notion of comparative advantage refers to one’s relative efficiency in doing an activity over that of the other person
    • In other words, if one has a comparative advantage in an activity over another person’s, one will have a lower opportunity cost of doing the activity than the other person
    • Since Ted has a lower opportunity cost of washing cars (1/3 units of car wax forgone) than Tom whose opportunity cost of washing cars is 1/2 units of car wax forgone), TED HAS A COMPARATIVE ADVANTAGE IN WASHING A CAR
  • Same logic can be applied to comparative advantage in waxing cars
problem 3 chapter 2
Problem #3, Chapter 2
  • Toby can produce 5 gallons of apple cider or 2.5 ounces of feta cheese per hour. Kyle can produce 3 gallons of apple cider or 1.5 ounces of feta cheese per hour. Can Toby and Kyle benefit from specialization and trade? Explain.
solution to problem 3 1
Solution to problem #3 (1)
  • In order to answer this question, we will need to compute the opportunity costs of producing apple cider and feta cheese per hour
  • Both Toby and Kyle have two options to choose from: producing apple cider or feta cheese
solution to problem 3 2
Solution to problem #3 (2)

Toby

  • Opportunity cost of producing apple cider
    • 2.5 units of feta cheese forgone in an hour / 5 units of apple cider produced in an hour
    • Toby’s opportunity cost of producing apple cider is 1/2 units of feta cheese
  • Opportunity cost of producing feta cheese
    • 5 units of apple cider forgone in an hour / 2.5 units of feta cheese produced in an hour
    • Toby’s opportunity cost of producing feta cheese is 2 units of apple cider
solution to problem 3 3
Solution to problem #3 (3)

Kyle

  • Opportunity cost of producing apple cider
    • 1.5 units of feta cheese forgone in an hour / 3 units of apple cider produced in an hour
    • Kyle’s opportunity cost of producing apple cider is 1/2 units of feta cheese
  • Opportunity cost of producing feta cheese
    • 3 units of apple cider forgone in an hour / 1.5 units of feta cheese produced in an hour
    • Kyle’s opportunity cost of producing feta cheese is 2 units of apple cider
solution to problem 3 4
Solution to problem #3 (4)
  • Both of them have the opportunity costs of producing apple cider and feta cheese (1/2 units of feta cheese and 2 units of apple cider respectively)
  • They do not have a comparative advantage in producing apple cider or feta cheese over each other
  • Since benefits from trade rely on different opportunity costs among trading parties, there will be no gain from trade / specification
  • In other words, no comparative advantage = no gain from trade. Comparative advantage is from source of difference in technology, education attainment and skills
problem 5 chapter 2
Problem #5, Chapter 2
  • Consider a society consisting of only Helen, who allocates her time between sewing dresses and baking bread. Each hour she devotes to sewing dresses yields 4 dresses, and each hour devotes to baking bread yields 8 loaves of bread. If Helen works a total of 8 hours per day, graph her production possibilities curve.
solution to problem 5 1
Solution to problem #5 (1)
  • Under scarcity, each faces a time constraint
  • Helen has a total of 8 hours to either sewing dresses or baking bread
  • If Helen devotes all her available time to sewing dresses, she can sew 32 dresses a day (4 dresses per hour x 8 hours)
  • If Helen devotes all her available time to baking bread, she can bake 64 loaves of bread a day (8 loaves of bread per hour x 8 hours)
solution to problem 5 2
Solution to problem #5 (2)
  • Production possibilities curve
    • a curve showing different quantities of two goods (sewing dresses and baking bread)that an economy(Helen)can efficiently produce with a given amount of resources(a time constraint of 8 hours per day)

Dressed sewed per day

Slope of the curve = opportunity cost

32

1

Loaves of bread baked per day

2

64

0

solution to problem 5 3
Solution to problem #5 (3)
  • It does not matter what is on x-axis or y-axis as long as the graph is well-labeled

Loaves of bread baked per day

64

Dresses sewed per day

32

0

problem 7 chapter 2
Problem #7, Chapter 2
  • Suppose that in problem # 5 a sewing machine is introduced that enables Helen to sew 8 dresses per hour rather than only 4. Show how this development shifts her production possibilities curve.
solution to problem 7 1
Solution to problem #7 (1)
  • Suppose Helen now has a sewing machine to work with, her productivity in sewing dresses is increased from 4 dresses per day to 8 dresses per day. A 100% increase in the productivity
  • Given that she only has 8 hours to work a day, if she devotes all her time to sewing dresses, she can now work with the sewing machine and sew 64 dresses a day (8 dresses per hour x 8 hours)
solution to problem 7 2
Solution to problem #7 (2)

Dresses sewed per day

64

The productivity has increased from 32 dresses to 64 dresses a day

A sewing machine is introduced

32

Loaves of bread baked per day

64

0