Chapter 3

Refer to the Figure . Germany would incur an opportunity cost of 6 units of Good X if it increase its production of Good Y by

12 units Opportunity cost is whatever must be given up to obtain some item. According to Germany's production possibilities frontier, Germany gives up 16 units of Good Y in order to produce 8 units of Good X. Therefore, the opportunity cost of one unit of Good Y is (8 units of Good Y)/(16 units of Good X) = 1/2 unit of Good X per unit of Good Y. This means that if Germany gives up producing 6 units of Good X, it can increase production of Good Y by (6 units of Good X)/(1/2 unit of Good X per unit of Good Y)=12 units of Good Y.

Refer to the Table. Which of the following combinations of cheese and wine could France not produce in 40 hours?

4 units of cheese and 6 units of wine If France has 40 labor hours available, then if it produces 1 unit of cheese, this leaves 40 - (8 x 1) = 32 hours left to make wine, which means it can also make 16 units of wine. However, if it produces 4 units of cheese, this leaves 40 - (8 x 4) = 8 hours left to make wine, which means it can only produce 4 units of wine. The remaining two production combinations are also possible to produce in exactly 40 hours. Therefore, of these combinations, France cannot produce 4 units of cheese and 6 units of wine in only 40 hours.

Refer to the table. Assume that England and France each has 40 labor hours available. Before specialization and trade each country divides its time equally between the production of cheese and wine. Then, both countries decide they could be better off if they specialized in the production of one good and traded with each other. If England specializes in cheese and France specializes in wine and the countries trade 10 units of cheese for 8 units of wine, France's gains from trade will be

7.5 units of cheese and 2 units of wine. When the countries divide their time equally between the production of the two goods, France produces 2.5 units of cheese and 10 units of wine. When both countries specialize, France produces 0 units of cheese and 20 units of wine. France trades 8 units of wine with England in exchange for 10 units of cheese. France is left with (0 + 10 = 10) 10 units of cheese and (20 − 8 = 12) units of wine. France's gains from trade are (10 − 2.5 = 7.5) units of cheese and (12 − 10 = 2) units of wine.

Refer to the figure. Before specialization, Alan and Diana were dividing their time equally between the production of muffins and scones. If both decide to specialize in the good in which they have the comparative advantage, total production will increase by

Before specialization, both producers divided their time equally between scones and muffins, so Alan produced 200 scones and 150 muffins while Diana produced 200 scones and 100 muffins. In total, they produced 400 scones and 250 muffins. Alan can produce muffins at a lower opportunity cost than Diana (4/3 scones versus 2 scones), so he has a comparative advantage in the production of muffins. When Alan specializes in the production of muffins, he produces 300 muffins, and when Diana specializes in the production of scones, she produces 400 scones. After specialization, total production increases by (400 − 400 = 0) scones and (300 − 250 = 50) muffins. Alan and Diana can share the benefits of this increased production.

Suppose Maria and Nikki can produce ballet shoes. If Maria's opportunity cost of producing ballet shoes is higher than Nikki's opportunity cost of producing ballet shoes, then

Nikki has a comparative advantage in the production of ballet shoes.

Suppose that a worker in Shipville can produce either 5 units of oats or 20 pounds of tuna per year, and a worker in Grainland can produce either 20 units of oats or 5 pounds of tuna per year. There are 20 workers in each country. No trade occurs between the two countries. Shipville produces and consumes 50 units of oats and 200 pounds of tuna per year while Grainland produces and consumes 200 units of oats and 50 pound of tuna per year. If trade were to occur, Shipville would trade 60 pounds of tuna for 60 units of oats. If Shipville now completely specializes in tuna production, how many pounds of tuna could it now consume along with the 60 units of imported oats?

Now they can specilaizes only in Tuna. They can produce total of 400 pounds of tuna. If they trade 60 units of tuna for 60 pounds of tuna. now they can produce and consumes 340(400-60) pounds of tuna.

Imports are goods produced _____ and sold ________.

abroad; domestically

Economists use the term absolute advantage when describing the opportunity cost of two producers.

false