EC 231 Ch. 3 Homework

Rajiv and Simone are farmers. Each one owns a 20-acre plot of land. The following table shows the amount of rye and corn each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing rye or corn or to produce rye on some of the land and corn on the rest. (Data Chart saved in EC 231 folder) 1) On the following graph, use the blue line (circle symbol) to plot Rajiv's production possibilities frontier (PPF), and use the purple line (diamond symbol) to plot Simone's PPF. (Graph saved in EC 231 folder) 2) (Rajiv/Simone) has an absolute advantage in the production of rye, and (Simone/ Rajiv) has an absolute advantage in the production of corn. 3) Rajiv's opportunity cost of producing 1 bushel of corn is (?) bushels of rye, whereas Simone's opportunity cost of producing 1 bushel of corn is (?) bushels of rye. Because Rajiv has a (higher/lower) opportunity cost of producing corn than Simone, (Rajiv/Simone) has a comparative advantage in the production of corn, and (Rajiv/Simone) has a comparative advantage in the production of rye.

1) Image of graph saved in EC 231 folder 2)Simone; Simone 3)5; 4; higher; Simone; Rajiv

Consider two neighboring island countries called Bellissima and Dolorium. They each have 4 million labor hours available per week that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor. (Data Chart saved in EC 231 folder) Initially, suppose Bellissima uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Dolorium uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Bellissima produces 8 million pairs of jeans and 48 million bushels of rye, and Dolorium produces 15 million pairs of jeans and 20 million bushels of rye. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of jeans and rye it produces. 1) Bellissima's opportunity cost of producing 1 pair of jeans is (1/2 bushel/ 1/4 bushel/ 2 bushels/ 4 bushels) of rye, and Dolorium's opportunity cost of producing 1 pair of jeans is (1/2 bushel/ 1/4 bushel/ 2 bushels/ 4 bushels) of rye. Therefore, (Dolorium/Bellissima) has a comparative advantage in the production of jeans, and (Dolorium/Bellissima) has a comparative advantage in the production of rye. 2) Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce (?) million pairs per week, and the country that produces rye will produce (?) million bushels per week. Part 2 of question in the next card.

1) 2 bushes; 4 bushels; Bellissima; Dolorium 2) 32; 80

Suppose Bulgaria produces only smartphones and tablets. The resources that are used in the production of these two goods are not specialized—that is, the same set of resources is equally useful in producing both tablets and smartphones. The shape of Bulgaria's production possibilities frontier (PPF) should reflect the fact that as Bulgaria produces more tablets and fewer smartphones, the opportunity cost of producing each additional tablet (remains constant, decreases, increases). The following graphs show two possible PPFs for Bulgaria's economy: a straight-line PPF (PPF1) and a bowed-out PPF (PPF2). (Images of graphs saved in EC231 folder) Based on the previous description, the trade-off Bulgaria faces between producing tablets and smartphones is best represented by (Graph 1/ Graph 2).

1) Remains constant 2)Graph 1

In the following table, enter each country's production decision on the third row of the table (marked "Production"). Suppose the country that produces jeans trades 18 million pairs of jeans to the other country in exchange for 54 million bushels of rye. In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption." 1) When the two countries did not specialize, the total production of jeans was 23 million pairs per week, and the total production of rye was 68 million bushels per week. Because of specialization, the total production of jeans has increased by (?) million pairs per week, and the total production of rye has increased by (?) million bushels per week. Because the two countries produce more jeans and more rye under specialization, each country is able to gain from trade. 2) Calculate the gains from trade—that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption"). (Image of chart saved in EC 231 folder)

1) 9; 12 2) Image of chart saved in EC 231 folder

Suppose that Candonia and Sylvania agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 8 million pounds of lemons for 8 million pounds of tea. This ratio of goods is known as the price of trade between Candonia and Sylvania. 1) The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Candonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. (Image of graph saved in EC 231 folder) 2) The following graph shows the same PPF for Sylvania as before, as well as its initial consumption at point A. As you did for Candonia, place a black point (plus symbol) on the following graph to indicate Sylvania's consumption after trade. (Image of graph saved in EC 231 folder) 3) True or False: Without engaging in international trade, Candonia and Sylvania would have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.) - True - False

1) Graph saved in EC 231 folder 2) Graph saved in EC 231 folder 3) False

Suppose that Portugal and Austria both produce rye and cheese. Portugal's opportunity cost of producing a pound of cheese is 3 bushels of rye while Austria's opportunity cost of producing a pound of cheese is 11 bushels of rye. 1) By comparing the opportunity cost of producing cheese in the two countries, you can tell that (Austria/Portugal) has a comparative advantage in the production of cheese and (Portugal/Austria) has a comparative advantage in the production of rye. 2) Suppose that Portugal and Austria consider trading cheese and rye with each other. Portugal can gain from specialization and trade as long as it receives more than (1 bushel/ 1/11 bushel/ 1/3 bushel/ 3 bushels/ 11 bushels) of rye for each pound of cheese it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than ( 1 pound/ 1/11 pound/ 1/3 pound/ 3 pounds/ 11 pounds) of cheese for each bushel of rye it exports to Portugal. 3) Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of rye) would allow both Austria and Portugal to gain from trade? Check all that apply. - 6 bushels of rye per pound of cheese - 1 bushel of rye per pound of cheese - 2 bushels of rye per pound of cheese - 4 bushels of rye per pound of cheese

1) Portugal; Austria 2) 3 bushels; 1/11 pound 3) 6 bushels of rye per pound of cheese & 4 bushels of rye per pound of cheese

When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Candonia and Sylvania. Both countries produce lemons and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of tea, as indicated by the grey stars marked with the letter A. (Image of graphs saved in EC 231 folder) 1) Candonia has a comparative advantage in the production of (lemons/ tea/ neither lemons nor tea/ both lemons and tea) , while Sylvania has a comparative advantage in the production of (lemons/ tea/ neither lemons nor tea/ both lemons and tea) . Suppose that Candonia and Sylvania specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of (?) million pounds of lemons and (?) million pounds of tea. Part 2 of question on next card.

1) lemons; tea; 48; 48