Chapter 3: Test
Michael is a financial adviser. He bills his clients $100 an hour for his services. He can also mow his lawn in 45 minutes. He can hire someone to mow his lawn who takes 90 minutes. Of the following prices, which is the highest Michael would pay someone to mow his lawn?
$74
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?
340 pounds If Shipville completely specializes in tuna production, then it will use 20 workers to produce tuna which would result in 20 workers x 20 pounds of tuna per worker per year = 400 pounds of tuna per year. If it trades 60 pounds of tuna for 60 units of oats, this means can consume 400 - 60 = 340 pounds of tuna and 60 units of oats.
Which of the following statements about comparative advantage is not true?
A country cannot have a comparative advantage in producing a good unless it has an absolute advantage in producing that good. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. This principle applies to countries as well as individuals, and it is used to emphasize the potential benefits of free trade. Moreover, it is possible for a country to have a comparative advantage in producing a good without having an absolute advantage in producing that good since comparative advantage is determined by opportunity cost.
Refer to the Figure . Germany has an absolute advantage in the production of
Absolute advantage is the ability to produce a good using fewer inputs than another producer. Because Germany can produce more Good Y than Spain can produce, it has an absolutely advantage in the production of Good Y. Similarly, Spain can produce more Good X than Germany can, so it has an absolute advantage in the production of Good X.
Refer to the Figure . Which of the following is not correct?
According to Alan and Diana's production possibilities frontier, (100 scones, 150 muffins) is a point underneath Alan's PPF and on Diana's PPF. This means both of them could each consume this quantity without trade. However, this means that Diana cannot consume 150 muffins and 150 scones without trade since this is beyond her PPF. Therefore this statement cannot be true.
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.
Refer to the Table . At which of the following prices would both Brian and Tabitha gain from trade with each other?
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, Brian can produce pork at a lower opportunity cost than Tabitha (6/5 apples versus 5/3 apples) so he has a comparative advantage in the production of apples. Similarly, Tabitha can produce apples at a lower opportunity cost than Brian (3/5 pounds of pork versus 5/6 pounds of pork), so she has a comparative advantage in the production of apples. In order for Brian and Tabitha to both gain from trade, the price of a bushel of apples must be greater than 3/5 pounds of pork to incentive Tabitha to trade but less than 5/6 pounds of pork to benefit Brian. The only price that meets this criteria is 6 bushels of apples for 4 pounds of pork (which is equivalent to one bushel of apples for 2/3 pound of pork).
Both Denis and Carol produce cupcakes and cookies. If Denis's opportunity cost of 1 cupcake is 3 cookies and Carol's opportunity cost of 1 cupcake is 4 cookies, then
Denis has a comparative advantage in the production of cupcakes. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. In this case, Denis's opportunity cost for the production of cupcakes is 3 cookies, and his opportunity cost for the production of cookies is 1/3 cupcakes. Similarly, Carol's opportunity cost of producing cupcakes is 4 cookies, and her opportunity cost of producing cookies is 1/4 cupcakes. Therefore, Denis has a comparative advantage in the production of cupcakes, and Carol has a comparative advantage in the production of cookies.
President Barack Obama should probably not mow his own lawn because he has a comparative advantage in mowing his lawn relative to a landscaping service.
Even if President Obama can mow his own lawn faster than anyone else, whether or not he should mow his own lawn is a question of opportunity cost and comparative advantage. The time it takes for the President to mow his lawn means less time for him to spend meeting with Congress, working out policy decisions, etc. In order words, there's likely a high opportunity cost for him to mow his lawn. Therefore, President Obama should pay someone to mow his lawn unless he has a comparative advantage over everyone else in doing so.
The production possibilities frontier illustrates the combinations of output that an economy should produce.
False
Economists use the term absolute advantage when describing the opportunity cost of two producers.
False Absolute advantage is the ability to produce a good using fewer inputs than another producer does, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.
Which of the following statements is not correct? -Trade has the potential to benefit all nations. -Comparative advantage is the driving force of specialization. -Trade does not allow for specialization. -Trade allows nations to consume outside of their production possibilities curves.
Trade does not allow for specialization.
For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to have a comparative advantage in both activities.
True
Imports are goods produced _____ and sold ________.
abroad; domestically
Refer to the Figure. Argentina should specialize in the production of
coffee and import soybeans. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. A country should specialization in the production of the good for which it has a comparative advantage. In this case, Argentina can produce coffee at a lower opportunity cost than Brazil (1/2 pounds of soybeans versus 3/4 pounds of soybeans). Therefore, Argentina should specialize in the production of coffee and import soybeans from Argentina.
Exports are goods produced _____ and sold ________.
domestically; abroad
Suppose Canada and China can both produce cars and airplanes, and Canada has the comparative advantage in the production of airplanes while China has the comparative advantage in the production of cars. Also, suppose China has an absolute advantage in the production of both cars and airplanes. China should
export cars to Canada and import airplanes from Canada. If Canada has the comparative advantage in the production of airplanes and China has the comparative advantage in the production of cars, then Canada should specialize in airplanes and China should specialize in cars. This means that China would export cars to Canada and import airplanes from Canada. Similarly, Canada would import cars from China and export airplanes to China.
Refer to the Table . Korea should export
freezers and import tablets. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. A country should specialization in the production of the good for which it has a comparative advantage. In this case, Korea can produce freezers at a lower opportunity cost than Mexico (1/5 tablet versus 1/2 tablet). Therefore, Korea should export freezers and import tablets.
Absolute advantage is
the ability to produce a good using fewer inputs than another producer.
China and Japan both produce clothing and computers. China is said to have the comparative advantage in producing clothing if
the opportunity cost of producing clothing is lower for China than it is for Japan Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. Therefore, in order for China to have a comparative advantage in producing clothing, the opportunity cost of producing clothing must be lower for China than for Japan.
Suppose that a worker in Tabletland can produce either 4 tablets or 1 television per year, and a worker in Ledville can produce either 2 tablets or 4 televisions per year. Each nation has 50 workers. Also suppose that each country completely specializes in producing the good in which it has a comparative advantage. If Tabletland trades 50 radios to Ledville in exchange for 50 televisions each year, then each country's maximum consumption of new tablets and televisions per year will be
150 tablets, 50 televisions in Tabletland and 50 tablets, 150 televisions in Ledville. Tabletland's opportunity cost for producing tablets (1/4 televisions) is lower than that of Ledville (2 televisions), so Tabletland will produce only tablets if there is complete specialization. Similarly, Ledville's opportunity cost for producing televisions (1/2 tablet) is lower than that of Tabletland (4 tablets), so Ledville will produce only televisions if there is complete specialization. If each nation has 50 workers, this means that total production will be 200 tablets and 200 televisions. When the terms of trade are 50 radios in exchange for 50 televisions, this means that Tabletland's maximum consumption is 200 - 50 = 150 tablets and 0 + 50 = 50 televisions, and Ledville's maximum consumption is 0 + 50 = 50 tablets and 200 - 50 = 150 televisions.
Luke and Carol are two toymakers who both produce trains and cars. In one month, Luke can produce 5 trains or 20 cars, whereas Carol can produce 8 trains or 24 cars. Given this, we know that
Carol has an absolute advantage in cars. Absolute advantage is the ability to produce a good using fewer inputs than another producer. Because Carol can produce more cars in a month than Luke can produce, Carol has an absolute advantage in cars. Similarly, Carol can produce more trains in a month than Luke can produce, so she also has an absolute advantage in trains. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. In this case, Luke has a comparative advantage in cars, and Carol has a comparative advantage in trains.
China has a comparative advantage in the production of silk, but Japan has an absolute advantage in the production of silk. If these two countries decide to trade,
China should export silk to Japan. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle emphasizes the potential benefits of free trade. A country should specialize in the production of the good for which it has a comparative advantage. Therefore, if China and Japan decide to trade, China would specialize in silk and export this good to Japan.
Refer to the Figure. Brazil should specialize in the production of
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. A country should specialization in the production of the good for which it has a comparative advantage. In this case, Brazil can produce soybeans at a lower opportunity cost than Argentina (4/3 pounds of coffee versus 2 pounds of coffee). Therefore, Brazil should specialize in the production of soybeans and import coffee from Argentina.
Refer to the Table. France should export
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. A country should specialization in the production of the good for which it has a comparative advantage. In this case, France can produce cheese at a lower opportunity cost than Italy (1/4 units of wine versus 1/2 units of wine). Therefore, France should export cheese and import wine.
Refer to the Table. Italy should export
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. A country should specialization in the production of the good for which it has a comparative advantage. In this case, Italy can produce wine at a lower opportunity cost than France (2 units of cheese versus 4 units of wine). Therefore, Italy should export wine and import cheese.
Refer to the Table . Mexico should export
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. A country should specialize in the production of the good for which it has a comparative advantage. In this case, Mexico can produce tablets at a lower opportunity cost than Korea (2 freezers per tablet versus 5 freezers per tablet). Therefore, Mexico should export tablets and import freezers.
Refer to the Figure . At which of the following prices would both Alan and Diana gain from trade with each other?
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, 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. Similarly, Diana can produce scones at a lower opportunity cost than Alan (1/2 muffins versus 3/4 muffins), so she has a comparative advantage in the production of scones. In order for Alan and Diana to both gain from trade, the price of a muffin must be greater than 4/3 scones to incentive Alan to trade but less than 2 scones to benefit Diana. The only price that meets this criteria is 12 muffins for 21 scones (which is equivalent to one muffin for 7/4 scones).
Refer to the Figure . Alan should specialize in the production of
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, 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. Similarly, Diana can produce scones at a lower opportunity cost than Alan (1/2 muffins versus 3/4 muffins), so she has a comparative advantage in the production of scones. Therefore, Alan should specialize in the production of muffins and Diana should specialize in the production of scones.
Refer to the Table . Brian should specialize in the production of
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, Brian can produce pork at a lower opportunity cost than Tabitha (6/5 apples versus 5/3 apples) so he has a comparative advantage in the production of apples. Similarly, Tabitha can produce apples at a lower opportunity cost than Brian (3/5 pounds of pork versus 5/6 pounds of pork), so she has a comparative advantage in the production of apples. Therefore, Brian should specialize in the production of pork and Tabitha should specialize in the production of apples.
Refer to the Table . Assume that Brian and Tabitha each has 120 minutes available. If each person spends all his or her time producing the good in which he or she has a comparative advantage, then total production is
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, Brian can produce pork at a lower opportunity cost than Tabitha (6/5 apples versus 5/3 apples) so he has a comparative advantage in the production of apples. Similarly, Tabitha can produce apples at a lower opportunity cost than Brian (3/5 pounds of pork versus 5/6 pounds of pork), so she has a comparative advantage in the production of apples. Therefore, total production is 120 minutes / 6 minutes per bushel of apples = 20 bushels of apples and 120 minutes / 12 minutes per pound of pork = 10 pounds of pork.
Refer to the Figure . Germany has a comparative advantage in the production of
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, Germany can produce Good Y at a lower opportunity cost than Spain (1/2 unit of Good X versus 2 units of Good X) so Germany has a comparative advantage in the production of Good Y. Similarly, Spain can produce Good X at a lower opportunity cost than Germany (1/2 units of Good Y versus 2 units of Good Y), so Spain has a comparative advantage in the production of Good X.
Refer to the Figure . At which of the following prices would both Germany and Spain gain from trade with each other?
Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. In this case, Germany can produce Good Y at a lower opportunity cost than Spain (1/2 unit of Good X versus 2 units of Good X) so Germany has a comparative advantage in the production of Good Y. Similarly, Spain can produce Good X at a lower opportunity cost than Germany (1/2 units of Good Y versus 2 units of Good Y), so Spain has a comparative advantage in the production of Good X. In order for Germany and Spain to both gain from trade, the price of a unit of Good X must be greater than 1/2 unit of Good Y to incentive Spain to trade but less than 2 units of Good Y to benefit Germany. The only price that meets this criteria is 9 units of Good Y for 6 units of Good X (which is equivalent to 1.5 units of Good Y per unit of Good X).
Tom Cruise should pay someone else to mow his lawn instead of mowing it himself, unless
Cruise has a comparative advantage over everyone else in mowing his lawn. Even if Tom Cruise can mow his own lawn faster than anyone else, whether or not he should mow his own lawn is a question of opportunity cost and comparative advantage. The time it takes for Cruise to mow his lawn means less time for him to spend making movies, participating in media events, etc. In order words, there's likely a high opportunity cost for him to mow his awn. Therefore, Cruise should pay someone to mow his lawn unless he has a comparative advantage over everyone else in doing so.
Refer to the Figure. If Adam and Deirdre both spend all of their time producing tacos, then total production is
If Adam devotes all of his time to producing tacos then he can produce 400 tacos and no burritos. If Deirdre devotes all of her time to producing tacos then she can also produce 400 tacos and no burritos. Therefore, if they both spend all of their time producing tacos, then total production is 400 + 400 =800 tacos 0 burritos.
Refer to the Figure. If Adam and Deirdre each divides his/her time equally between the production of tacos and burritos, then total production is
If Adam divides his time equally between the production of tacos and burritos, then he can produce 400/2=200 tacos and 400/2=200 burritos. Similarly, Deirdre can produce 400/2=200 tacos and 100/2=50 burritos. Therefore, together they can produce 200 + 200 = 400 tacos and 200 + 50 = 250 burritos.
Refer to the figure. Adam and Deirdre decide they could both be better off if they specialized in the production of one good and traded with each other. If Adam specializes in burritos and Deirdre specializes in tacos, then the total production is
If Adam specializes in burritos, Adam will produce 0 tacos and 400 burritos. If Deirdre specializes in tacos, Deirdre will produce 400 tacos and 0 burritos. Therefore, total production is 400 tacos and 400 burritos.
Refer to the Table. Which of the following combinations of cheese and wine could England not produce in 40 hours?
If England has 40 labor hours available, then if it produces 5 units of cheese, this leaves 40 - (1 x 5) = 35 hours left to make wine, which means it can also make 7 units of wine. However, if it produces 15 units of cheese, this leaves 40 - (1 x 15) = 25 hours left to make wine, which means it can only produce 5 units of wine. The remaining two production combinations are also possible to produce in exactly 40 hours. Therefore, of these combinations, England cannot produce 15 units of cheese and 6 units of wine in only 40 hours.
Refer to the Table. Which of the following combinations of cheese and wine could England produce in 40 hours?
If England has 40 labor hours available, then it cannot produce any wine if it produces 40 units of cheese because it takes 1 hour to produce one unit of cheese. Similarly, it cannot produce any cheese if it produces 8 units of wine because it would take all 40 hours to make that much wine. If England produces 5 units of cheese, this leaves 40 - (5 x 1) = 35 hours left to make wine, which means it can also make 7 units of wine.
Refer to the table. Assume that England and France each has 40 labor hours available. 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, then the total production is
If England specializes in the production of cheese, England will spend all 40 hours of labor producing cheese and will produce 40 units of cheese and 0 units of wine. If France specializes in the production of wine, France will spend all 40 hours of labor producing wine and will produce 0 units of cheese and 20 units of wine. Therefore, total production is 40 units of cheese and 20 units of wine.
Refer to the Table. Assume that England and France each has 40 labor hours available. If each country divides its time equally between the production of cheese and wine, then total production is
If England spends 20 hours of labor producing wine and 20 hours producing cheese, this means that it produces 20 units of cheese and 4 units of wine. Similarly, France produces 2.5 units of cheese and 10 units of wine. Therefore, total production is 20 + 2.5 = 22.5 units of cheese and 4 + 10 = 14 units of wine.
Refer to the Table. Which of the following combinations of cheese and wine could France not produce in 40 hours?
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. Which of the following combinations of cheese and wine could France produce in 40 hours?
If France has 40 labor hours available, then it cannot produce any wine if it produces 5 units of cheese because it takes 8 hours to produce one unit of cheese. Similarly, it cannot produce any cheese if it produces 20 units of wine because it would take all 40 hours to make that much wine. If France produces 2 units of cheese, this leaves 40 - (8 x 2) = 24 hours left to make wine, which means it can also make 12 units of wine.
Refer to the Figure. If Luigi and Maria both spend all of their time producing meatballs, then total production is
If Luigi devotes all of his time to producing meatballs then he can produce 300 meatballs and no pizzas. If Maria devotes all of her time to producing meatballs then she can also produce 400 meatballs and no pizzas. Therefore, if they both spend all of their time producing meatballs, then total production is 300 + 400 =700 meatballs 0 pizzas.
Refer to the Figure. If Luigi and Maria each divides his/her time equally between the production of meatballs and pizzas, then total production is
If Luigi divides his time equally between the production of meatballs and pizzas, then he can produce 300/2=150 meatballs and 400/2=200 pizzas. Similarly, Maria can produce 300/2=150 meatballs and 300/2=150 pizzas. Therefore, together they can produce 150 + 200 = 350 meatballs and 150 + 150 = 300 pizzas.
Suppose Jake and Tim can both produce two goods: football helmets and baseball bats. Which of the following is not possible?
Jake has a comparative advantage in the production of football helmets and in the production of baseball hats.
If Jeff can produce more cookies in one day than Josie can produce in one day, then
Jeff has an absolute advantage in the production of cookies.
Suppose that a worker in Wheatville can grow either 50 bushels of wheat or 10 bushels of oats per year, and a worker in Oatland can grow either 25 bushels of wheat or 5 bushels of oats per year. There are 15 workers in Wheatville and 15 workers in Oatland. Which of the following statements is true?
Neither country could gain from trade with each other because neither one has a comparative advantage. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle emphasizes the potential benefits of free trade. In this case, the opportunity cost for producing wheat (1/5 bushels of oats) versus oats (5 bushels of wheat) is identical for both countries. Therefore, neither country could gain from trade with each other because neither one has a comparative advantage.
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. Absolute advantage is the ability to produce a good using fewer inputs than another producer, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. 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 this good.
Refer to the Figure . Alan's opportunity cost of one muffin is ______ and Diana's opportunity cost of one muffin is ______.
Opportunity cost is whatever must be given up to obtain some item. According to Alan's production possibilities frontier, Alan gives up 400 scones in order to produce 300 muffins. Therefore, the opportunity cost of one muffin is 400 scones/300 muffins=4/3 scones per muffin. Similarly, the opportunity cost of one muffin for Diana is 400 scones/200 muffins=2 scones per muffin.
Refer to the Figure . Germany's opportunity cost of one unit of Good X is
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 X is (16 units of Good Y)/(8 units of Good X) = 2 units of Good Y per unit of Good X. Similarly, Spain's opportunity cost of one unit of Good X is (10 units of Good Y)/(20 units of Good X) = 1/2 units of Good Y per unit of Good X.
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
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.
Suppose Jessica can wash six windows per hour or she can iron twelve shirts per hour. Peter can wash four windows per hour or he can iron ten shirts per hour. Which of the following is not true?
Peter has an absolute advantage over Jessica in ironing shirts. Absolute advantage is the ability to produce a good using fewer inputs than another producer, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. In this case, Jessica can wash more windows then Peter and iron more shirts than Peter given the same amount of time, so she has an absolute advantage over Peter in both washing windows and ironing shirts. Because Jessica can wash windows at a lower opportunity cost than Peter (12 / 6 = 2 shirts per window versus 10 / 4 2.5 shirts per window), Jessica has a comparative advantage over Peter in washing windows. Similarly, Peter has a comparative advantage over Jessica in ironing shirts.
Assume that Sweden has a comparative advantage in chocolate and Italy has a comparative advantage in wine. Also assume that Sweden has an absolute advantage in both chocolate and wine. If these two countries specialize and trade so as to maximize the benefits of specialization and trade, then
Sweden will produce more chocolate than it would produce in the absence of trade. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle is the driving force of specialization and trade. Because Sweden has a comparative advantage in chocolate, it will produce more chocolate than it would produce in the absence of trade. Similarly because Italy has a comparative advantage in wine, it will produce more wine than it would produce in the absence of trade. Specialization would result in the two countries' combined output of both goods being higher than it would be in the absence of trade, allowing each country to consume more than it would in the absence of trade.
Refer to the Table . What is Tabitha's opportunity cost of producing one bushel of apples?
The opportunity cost of producing one bushel of apples is the quantity of pork that must be given up to produce an additional bushel of apples. In this case, Tabitha can produce one bushel of apples in 6 minutes. Since it takes 10 minutes to produce a pound of pork, this means that she gives up 6/10 = 3/5 pound of pork when she produces one bushel of apples.
Refer to the Table . What is Brian's opportunity cost of producing one pound of pork?
The opportunity cost of producing one pound of pork is the quantity of apples that must be given up to produce an additional pound of pork. In this case, Brian can produce one pound of pork 12 minutes. Since it takes 10 minutes to produce a bushel of apples, this means that he gives up 12/10 = 6/5 bushels of apples when he produces one pound of pork.
Which of the following would not result from all countries specializing according to the principle of comparative advantage?
The production possibilities frontier for each country would shift inward. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; this principle emphasizes the potential benefits of free trade. When countries engage in specialization and trade according to this principle, the overall size of the economic pie increases, production of goods and services rises, and the citizens in each country experience an increase in well-being.
Refer to the Table. We could use the information in the table to draw a production possibilities frontier for England and a second production possibilities frontier for France. If we were to do this, measuring cheese along the horizontal axis, then
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. If cheese is along the horizontal axis, this means that the slope of England's production possibilities frontier represents the opportunity cost of producing cheese in terms of wine. In this case, England can produce cheese 5 times faster than wine, so it gives up 0.2 units of wine for every unit of cheese it produces. Similarly, France gives up 4 units of wine for every unit of cheese it produces. Because the production of one good means giving up the production of another, the slope of a production possibilities must always be negative. Therefore, the slope of England's production possibilities frontier would be -0.2 and the slope of France's production possibilities frontier would be -4.
Refer to the Table. We could use the information in the table to draw a production possibilities frontier for England and a second production possibilities frontier for France. If we were to do this, measuring wine along the horizontal axis, then
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. If wine is along the horizontal axis, this means that the slope of England's production possibilities frontier represents the opportunity cost of producing wine in terms of cheese. In this case, England can produce cheese 5 times faster than wine, so it gives up 5 units of cheese for every unit of wine it produces. Similarly, France gives up 0.25 units of cheese for every unit of wine it produces. Because the production of one good means giving up the production of another, the slope of a production possibilities diagram must always be negative. Therefore, the slope of England's production possibilities frontier would be -5 and the slope of France's production possibilities frontier would be -0.25.
Refer to the Figure. If the production possibilities frontier shown is for 24 hours of production, then how long does it take Mexico to produce one avocado?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the horizontal intercept of this frontier shows the quantity of avocados Mexico can produce if it devotes all its resources (including time) to the production of that good. If it takes Mexico 24 hours to produce 6 avocados, this means it takes 24/6=4 hours to produce one avocado.
Refer to the Figure. If the production possibilities frontier shown is for two months of production, then which of the following combinations of beans and avocados could Mexico not produce in two months?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of Mexico's production possibilities frontier represents the opportunity cost of producing avocados in terms of beans. Since Mexico gives up producing 240 beans when it chooses to make 6 avocados, the opportunity cost of producing an avocado is 240/6=40 beans. Suppose Mexico is initially producing 0 avocados and 240 beans (this is the vertical intercept of Mexico's production possibilities frontier.) If Mexico chooses to produce 1 avocado, then it can only produce 240 - 40= 200 beans. If Mexico chooses to produce 3 avocados, then it can only produce 240-(40X3)=120 beans. Therefore, Mexico cannot produce 3 avocados and 140 beans because this lies outside of its production possibilities frontier.
Refer to the Figure. If the production possibilities frontier shown is for two months of production, then which of the following combinations of beans and avocados could Mexico produce in two months?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of Mexico's production possibilities frontier represents the opportunity cost of producing avocados in terms of beans. Since Mexico gives up producing 240 beans when it chooses to produce 6 avocados, the opportunity cost of producing an avocado is 240/6=40 beans. Suppose Mexico is initially producing 0 avocados and 240 beans (this is the vertical intercept of Mexico's production possibilities frontier.) If Mexico chooses to produce 1 avocado, then it can only produce 240 - 40= 200 beans. Therefore, if Mexico chooses to produce 2 avocados, then it can only produce 240 - (40 x 2) = 160 beans.
The principle of comparative advantage does not provide answers to certain questions. One of those questions is
What determines the price at which trade takes place? Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. These principles provide answers to questions like "Is it possible for specialization and trade to benefit more than one party to a trade?" and "Is it possible for specialization and trade to increase total output of traded goods?" However, what it does not answer is what determines the terms of trade and how are the gains from trade shared among the parties to a trade.
Refer to the Figure. If the production possibilities frontiers shown are each for one day of production, then which of the following combinations of meatballs and pizzas could Luigi and Maria together produce in a given day?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of each person's production possibilities frontier represents the opportunity cost of producing meatballs in terms of pizzas. Since Luigi gives up producing 300 pizzas when he chooses to make 300 meatballs, the opportunity cost of producing a meatball is 300/300=1 pizza. Similar calculations yield an opportunity cost of 300/400=0.75 pizza per meatball for Maria. Because Maria has the lower opportunity cost for producing meatballs, she should make the first 400 meatballs and then Luigi should supplement with the necessary meatball production and produce whatever pizzas he can with his remaining resources. For example, if Maria produces 400 meatballs and 0 pizzas, then Luigi can produce 0 meatballs and 300 pizzas. Since there is not a more productive way for them to allocate resources to produce 400 meatballs, you know that 400 meatballs and 350 pizzas cannot represent total production in one day. Therefore, if Maria produces 400 meatballs and 0 pizzas, then Luigi can produce 100 meatballs and 200 pizzas for a total production of 400 + 100 = 500 meatballs and 200 pizzas.
Refer to the Figure. If point A represents Anne's current production and point B represents Brianna's current production, under what circumstances can both Anne and Brianna benefit from specialization and trade?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of each person's production possibilities frontier represents the opportunity cost of producing pizza in terms of lemonade. Since Anne gives up producing 400 lemonades when she chooses to make 200 pizzas, the opportunity cost of producing a pizza is 400/200=2 lemonades. Similar calculations yield an opportunity cost of 450/300=1.5 lemonades per pizza for Brianna. Because Brianna has the lower opportunity cost for producing pizzas and Anne has the lower opportunity cost for producing lemonade, Anne and Brianna would benefit from specialization and trade if Anne produces more lemonade and Brianna produces more pizzas.
Refer to the Figure. Point A represents Anne's current production and point B represents Bridget's current production. True or False: In order to benefit from specialization and trade, Anne should produce more pizza and Bridget should produce more lemonade.
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of each person's production possibilities frontier represents the opportunity cost of producing pizza in terms of lemonade. Since Anne gives up producing 400 lemonades when she chooses to make 200 pizzas, the opportunity cost of producing a pizza is 400/200=2 lemonades. Similar calculations yield an opportunity cost of 450/300=1.5 lemonades per pizza for Brianna. Because Brianna has the lower opportunity cost for producing pizzas and Anne has the lower opportunity cost for producing lemonade, Anne and Brianna would benefit from specialization and trade if Anne produces more lemonade and Brianna produces more pizzas.
Refer to the Figure. If the production possibilities frontiers shown are each for one day of production, then which of the following combinations of tacos and burritos could Adam and Deirdre together not produce in a given day?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of each person's production possibilities frontier represents the opportunity cost of producing tacos in terms of burritos. Since Adam gives up producing 400 burritos when he chooses to make 400 tacos, the opportunity cost of producing a taco is 400/400=1 burrito. Similar calculations yield an opportunity cost of 100/400=0.25 burrito per taco for Deirdre. Because Deirdre has the lower opportunity cost for producing tacos, she should make the first 400 tacos and then Adam should supplement with the necessary taco production and produce whatever burritos he can with his remaining resources. For example, if Deirdre produces 400 tacos and 0 burritos, then Adam can produce 0 tacos and 400 burritos. If instead Deirdre produces 400 tacos and 0 burritos, then Adam can produce 150 tacos and 250 burritos, for a total production of 400 + 150 = 550 tacos and 250 burritos. Lastly, if Deirdre produces 400 tacos and 0 burritos, then Adam can only produce 300 tacos and 100 burritos for a total production of 400 + 300 = 700 tacos and 100 burritos. Since there is not a more productive way for them to allocate resources to produce 700 tacos, you know that 700 tacos and 150 burritos cannot represent total production in one day.
Refer to the Figure. If the production possibilities frontiers shown are each for one day of production, then which of the following combinations of tacos and burritos could Adam and Deirdre together produce in a given day?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of each person's production possibilities frontier represents the opportunity cost of producing tacos in terms of burritos. Since Adam gives up producing 400 burritos when he chooses to make 400 tacos, the opportunity cost of producing a taco is 400/400=1 burrito. Similar calculations yield an opportunity cost of 100/400=0.25 burrito per taco for Deirdre. Because Deirdre has the lower opportunity cost for producing tacos, she should make the first 400 tacos and then Adam should supplement with the necessary taco production and produce whatever burritos he can with his remaining resources. For example, if Deirdre produces 400 tacos and 0 burritos, then Adam can produce 0 tacos and 400 burritos. Since there is not a more productive way for them to allocate resources to produce 400 tacos, you know that 400 tacos and 500 burritos cannot represent total production in one day. Therefore, if Deirdre produces 400 tacos and 0 burritos, then Adam can produce 100 tacos and 300 burritos for a total production of 400 + 100 = 500 tacos and 300 burritos.
Refer to the Figure. If the production possibilities frontiers shown are each for one day of production, then which of the following combinations of meatballs and pizzas could Luigi and Maria together not produce in a given day?
The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the slope of each person's production possibilities frontier represents the opportunity cost of producing tacos in terms of pizzas. Since Luigi gives up producing 300 pizzas when he chooses to make 300 meatballs, the opportunity cost of producing a meatball is 300/300=1 pizza. Similar calculations yield an opportunity cost of 300/400=0.75 pizza per meatball for Maria. Because Maria has the lower opportunity cost for producing meatballs, she should make the first 400 meatballs and then Luigi should supplement with the necessary meatball production and produce whatever pizzas he can with his remaining resources. For example, if Maria produces 400 meatballs and 0 pizzas, then Luigi can produce 0 meatballs and 300 pizzas. If instead Maria produces 400 meatballs and 0 pizzas, then Luigi can produce 100 meatballs and 200 pizzas, for a total production of 400 + 100 = 500 meatballs and 200 pizzas. Lastly, if Maria produces 400 meatballs and 0 pizzas, then Luigi can only produce 150 meatballs and 150 pizzas for a total production of 400 + 150 = 550 meatballs and 150 pizzas. Since there is not a more productive way for them to allocate resources to produce 550 meatballs, you know that 550 meatballs and 250 pizzas cannot represent total production in one day.
Trevor can shovel a driveway in two hours or he can plow a parking lot in 30 minutes. Paul can shovel a driveway in one hour or he can plow a parking lot in one hour. Given this we know that
Trevor has an absolute advantage in plowing a parking lot. Absolute advantage is the ability to produce a good using fewer inputs than another producer. Because Trevor can plow a parking lot in less time than Paul can, Trevor has an absolute advantage in plowing a parking lot. Similarly, Paul can shovel a driveway in less time than Trevor can, so Paul has an absolute advantage in shoveling a driveway. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. In this case, Paul has a comparative advantage in shoveling driveways, and Trevor has a comparative advantage in plowing parking lots.
When the economy is self-sufficient, an economy's production possibilities frontier is also its consumption possibilities frontier.
True The production possibilities frontier shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. When an economy is self-sufficient, this means that specialization and trade do not occur, so that economy can only consume what it can produce. In this case, an economy's production possibilities frontier is also its consumption possibilities frontier.
Refer to the figure. Before specialization, Germany and Spain were dividing their time equally between the production of Good X and Good Y. If both countries decide to specialize in the good in which they have the comparative advantage, total production will increase by
When both countries divide their time equally between the production of Good X and the production of Good Y, Germany produces 4 units of Good X and 8 units of Good Y and Spain produces 10 units of Good X and 5 units of Good Y for a total of (4 + 10 = 14) units of Good X and (8 + 5 = 13) units of Good Y. Germany can produce Good Y at a lower opportunity cost than Spain (1/2 unit of Good X versus 2 units of Good X), so Germany has a comparative advantage in the production of Good Y. Similarly, Spain can produce Good X at a lower opportunity cost than Germany (1/2 units of Good Y versus 2 units of Good Y), so Spain has a comparative advantage in the production of Good X. When Spain produces only Good X, it produces 20 units. When Germany produces only Good Y, it produces 16 units. Therefore, total production increases by (20 − 14 = 6) units of Good X and (16 − 13 = 3) units of Good Y. Germany and Spain share the benefits of the increased production.
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, England's gains from trade will be
When the countries divide their time equally between the production of the two goods, England produces 20 units of cheese and 4 units of wine. When both countries specialize, England produces 40 units of cheese and 0 units of wine. England trades 10 units of cheese with France in exchange for 8 units of wine. England is left with (40 − 10 = 30) units of cheese and (0 + 8 = 8) units of wine. England's gains from trade are (30 − 20 = 10) units of cheese and (8 − 4 = 4) units of wine.
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
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 and trade, Adam and Deirdre each divide his and her time equally between the production of tacos and burritos. Then, both decide they could be better off if they specialized in the production of one good and traded with each other. If Adam specializes in burritos and Deirdre specializes in tacos and they trade 200 tacos for 125 burritos, Adam and Deirdre's gains from trade will be
When they divide their time equally between the production of the two goods, Adam produces 200 tacos and 200 burritos and Deirdre produces 200 tacos and 50 burritos. When both specialize, Adam produces 0 tacos and 400 burritos and Deirdre produces 400 tacos and 0 burritos. Deirdre trades 200 tacos with Adam in exchange for 125 burritos. Adam is left with (0 + 200 = 200) tacos and (400 − 125 = 275) burritos and Deirdre is left with (400 − 200 = 200) tacos and (0 + 125 = 125) burritos. Adam's gains from trade are (200 − 200 = 0) tacos and (275 − 200 = 75) burritos and Deirdre's gains from trade are (200 − 200 = 0) tacos and (125 − 50 = 75) burritos.
