Chapter 2 Comparative Advantage Q. 1, 3, 5, 7

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

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?

3. 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

4. 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

5. 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

6. 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?

7. 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

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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)

15. 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

16. 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

17. 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.

18. 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)

19. 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