Chapter 2

Trade makes people better off when:

people have different preferences.

Comparative advantage refers to:

the ability to produce a good with a lower opportunity cost than another producer.

Suppose that Ned can produce either potato chips or computer chips. If he only produces potato chips he can produce 16 bags in a day. If he only produces computer chips, he can produce 12 in a day. Drag the endpoints of the line to plot his production possibilities frontier (PPF) on the graph. What is the opportunity cost of computer chip production (in terms of bags of potato chips/computer chip)?

***Make sure to move green dots to 16 on potato chips and other side to 12 on computer chips*** Answer = 4/3

The main reason specialization can raise productivity is that:

knowledge in human brains is limited.

Assume Ireland and Morocco can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in Ireland can produce 10 t of grain or 5 t of dates in a season. Each farmer in Morocco can also produce 10 t of grain or 25 t of dates. Please answer the four questions. 1.) Which country has the absolute advantage in producing dates? 2.)Which country has the absolute advantage in producing grain? 3.)Which country has the comparative advantage in producing dates? 4.) Which country has the comparative advantage in producing grain?

1. Morocco 2. Neither 3. Morocco 4. Ireland

Suppose that Paulie and Vince each can produce ice cream or t-shirts. The table shows the quantity of each good that Paulie and Vince each can produce in one hour, respectively, if they devote all of their time and effort to making the good. Paulie - 4 Ice cream (cups) - 17 t-shirts (quantity) Vince - 8 Ice cream (cups) - 12 t-shirts (quantity) 1. What is Paulie's opportunity cost of producing one cup of ice cream (round to two decimal places)? 2. What is Vince's opportunity cost of producing one t-shirt (round to two decimal places)?

1.) 4.25 t-shirts 2.) .67 cups of ice cream

The figures illustrate the production possibilities available to Kate and Sarah with eight hours of labor in their bakery. Answer the questions according to these figures. *Given Graphs* 1.) Kate has a comparative advantage in? 2.) Sarah has a comparative advantage in?

1.) Cake 2.) Bread Step #1 Use Graphs to make chart. Breads | Cake Kate 4.00 8.00 Sarah 12.00 9.00 Step#2 Find the opportunity cost for All - K's O.C for 1 B is 2 C - K's O.C for 1 C is 0.5 C -------------------------- - S's O.C for 1 B is 0.75 C - S's O.C for 1 C is 1.33 C Step #3 - Kate should specialize in Cake because it has the lowest O.C for her. - Sarah should specialize in Bread because it has the lowest O.C for her. Step #4 Compare Kate and Sarah's Opportunity Costs to find Comparative Advantage. *Comparative Advantage is when a country can produce a good with the least opportunity cost*

These figures illustrate the production possibilities available to Kate and Sarah with eight hours of labor in their bakery. Answer the questions according to these figures. 1.) Kate has an absolute advantage in? 2.) Sarah has an absolute advantage in?

1.) Neither goods 2.) Both goods *Solution* According to the figures, Kate can produce 88 cakes or 44 loaves of bread if she allocates all of her resources to each item, and Sarah can produce 99 cakes or 1212 loaves of bread if she allocates all of her resources to each item. Sarah is more productive in both cake and bread, and thus has an absolute advantage in both goods over Kate, who has an absolute advantage in neither good.

A farmer produces both beans and corn on her farm. If she must give up 1616 bushels of corn to be able to get 66 bushels of beans, then her opportunity cost of 11 bushel of beans is.

2.67 bushels of corn.

A nation will not have a comparative advantage in a product if it does not also have an absolute advantage in the production of that good. (True or False?)

False

Absolute advantage is the source of the potential gains from specialization and trade.(True or False?)

False

Suppose that Paulie and Vinny each can produce ice cream or t-shirts. The table shows the quantity of each good that Paulie and Vinny each can produce in 11 hour, respectively, if they devote all of their time and effort into making the good. Round all answers to two decimal places. Ice cream | T-shirts Paulie 5.00 17.00 Vinny 10.00 14.00 a. What is Paulie's opportunity cost of producing a cup of ice cream? b. What is Vinny's opportunity cost of producing a t-shirt? c. Paulie has a comparative advantage in _________ and Vinny has a comparative advantage in _________

A. 3.6 B. 0.57 C. P = T-shirts V = Ice Cream

Jose sells his economics textbook from last semester, which he could sell back to the bookstore for $40, to Adolfo for $150. Adolfo had planned to pay $240 for the textbook at the bookstore. Which of the following statements is TRUE?

Both Jose and Adolfo are made better off by the trade.

Mark values his drum set at $800, and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.

Mark must value Ella's guitar for at least $800, and Ella must value Mark's drum set for at least $1000.

When trading with more developed countries,

less developed countries have a comparative advantage in the production of some goods or services.

How to calculate opportunity cost

https://www.youtube.com/watch/VZrNbHCkv6A

Absolute advantage can be determined by comparing different producers'

input requirements per unit of output.

Which term best describes the situation that, relative to England, France can produce beef at a lower cost of production (i.e., can produce beef using fewer inputs)?

absolute advantage

Economic growth in the modern era is primarily due to the:

creation of new knowledge.

Division of knowledge refers to:

people learning different tasks in which they specialize.

Christine and Paul are deciding how to split their time between writing music and lyrics for their new album. Their PPFs for 72 h of work are shown. Christine and Paul have to write music for 8 songs and lyrics for 12 songs (4 songs already have music). When they are done, they can go to a private island and relax from all their hard work. It is possible that they will use more than 72 h. Once they start writing lyrics and music, assuming their hired help packs for them and their plane is waiting outside their door, in how many hours can they board the plane to their relaxing island getaway? 1. ________H 2. Christine will write music for _______ songs 3. Paul will write music for _______ songs. 4. Christine will write lyrics for _____ songs. 5. Paul will write lyrics for______ songs.

1. Hours: 96 2. Christine will write music for 0 songs 3. Paul will write music for 8 songs 4. Christine will write lyrics for 12 songs 5. Paul will write lyrics for 0 songs

Vincent and Jean are two cooks who work in a village. Each of them can either bake cakes or make pizzas. Every ingredient is readily available to them, and the only scarce resource is the cooks' time. Vincent can bake 10 cakes or make 5 pizzas in an hour. Jean can bake 12 cakes or make 8 pizzas in an hour. Please answer the four questions. 1 . Which cook has the absolute advantage in baking cakes? 2 . Which cook has the absolute advantage in making pizzas? 3 . Which cook has the comparative advantage in baking cakes? 4 . Which cook has the comparative advantage in making pizzas?

1. Jean 2. Jean 3. Vincent 4. Jean Step #1 Make Chart Cakes | Pizzas Vincent 10 5 Jean 12 8 Step #2 Find the opportunity cost for All - V' O.C for 1 C is 0.5 P - V's O.C for 1 P is 2 C -------------------------- - J's O.C for 1 C is 0.67 P - J's O.C for 1 P is 1.5 C Step #3 (Answers Comparative Advantage) - Vincent should specialize in Cake because it has the lowest O.C for him. - Jean should specialize in Pizza because it has the lowest O.C for him . Step #4 Both of Jeans # in the chart (outputs) are higher than Vincent's given the the same period of time (input) therefore, Jean has Absolute Advantage in both pizza and cakes.

Each of 100 people receives a random item from a grocery store and assigns it a value between 1 (low) and 10 (high). They trade those items among themselves for items they prefer rather than those they randomly received and then assign a second value (again, 1 to 10) to the item that they end up with after the trading concludes. How would the sum of those values before trading compare with the sum after trading?

After trading, value would be higher because preferences are diverse.

A gardener can produce either beans or corn in her garden. The gardener's opportunity cost of a bushel of beans multiplied by her opportunity cost of a bushel of corn is

Equal to one

The process of specialization and trade has positive net benefits and is, therefore, beneficial to everyone. (True or False?)

False.

The table shows the units of output a worker can produce per month in Germany and Korea for two different goods: televisions and personal computers. Use this table to answer the question. Televisions | Computers Germany 40 10 Korea 16 8 Which of the statements is true?

Germany has a comparative advantage in the production of televisions, while Korea has a comparative advantage in the production of personal computers.

Which of the following best explains the term "specialization" with respect to trade?

Specialization occurs when people concentrate their productive resources on the goods and services they can produce most efficiently.

Suppose a famous baseball player, Jacob deGrom, hires a high-school student to paint his house. Which of the following is most likely TRUE?

The opportunity cost of painting a house is higher for Jacob deGrom than for the high-school student.

Matilda sells her iPhone, which she considers worthless, to Gabriel for $200. Which of the following statements is TRUE?

This trade created value because Gabriel is buying the iPhone for more than Matilda thinks it is worth.

Countries specialize in the production of foods for which they have a comparative advantage. (True or False?)

True

It can be mutually beneficial for two nations to specialize in goods for which they have a comparative advantage and than trade with one another. (True or False?)

True

Select the correct definition of the term "comparative advantage."

the ability to produce a good or service at a lower opportunity cost than another

Only a very small portion of people who use microwaves know how they work. This is an example of:

the division of knowledge.

Absolute advantage derives from which of the following?

the lowest cost of production

Kate and Sarah own a bakery together. The two figures illustrate the production possibilities available to them if they work at their bakery for 8 h a day. Answer the question using these figures. *Given Graphs* If Kate and Sarah both specialize in the good in which they have a comparative advantage, the

total production of bread will be 12 loaves, and the total production of cake will be 8 units.