1. Explain why the farmer’s opportunity cost of producing 1lb of meat is 2lb of potatoes.

1. 1. Explain why the farmer’s opportunity cost of producing 1lb of meat is 2lb of potatoes. • It takes farmer 20 hours to = 1 lb. meat • It takes farmer 10 hours to = 1lb. Potatoes • In the same 20 hours- he could have produced 2 lb. of potatoes. • …so in making 1 lb. meat , he has given up the opportunity to make 2lb. potatoes

2. 2. Explain why the rancher’s opportunity cost of producing 1lb of meat is 1/8 lb of potatoes. • It takes rancher 1 hr to = 1lb meat • It takes rancher 8 hrs to = 1lb. Potatoes • In the 1 hr he used to make meat, he could have produced 1/8 lb potatoes • …so in making 1lb meat, he has given up the opportunity to make 1/8 lb potatoes

3. 3. Maria can read 20 pg. of econ in 1hr. or she can read 50 pg. of sociology in 1hr. She spends 5 hrs. per day studying. • A. draw Maria’s PPF • B. what is her opportunity cost of reading 100 pages of sociology? • She can read 100 pg. soc. in 2 hours • In the same 2 hours she could have read 40 pg. econ 100 econ 250 soc.

4. 4. Given the following information about US and Japanese labor and production: • 1 American worker can produce 4 cars / year • 1 Japanese worker can produce 4 cars / year • 1 American worker can produce 10 tons grain / year • 1 Japanese worker can produce 5 tons grain /year • There are 100 million workers in each country

5. a. construct a table similar to table 3-1 in your text 1 workers production cars /yr tons/grain/yr US 4 10 Japan 4 5

6. b. graph PPF for US and Japanese economies*remember – they have 100 million workers 400 US Cars/millions Japan 500 1000 Tons grain/ millions

7. c. For the US, what is the opportunity cost of 1 car (show your work) • OC of 1 car = 10 tons 4 cars • d. For the US, what is the opportunity cost of 1 ton of grain (show your work) • OC of 1 ton = 4 cars 10 tons = 2.5 tons grain x 100 mill. workers = 0.4 cars x 100 mill workers

8. e. For Japan, what is the opportunity cost of 1 car (show your work) OC 1 car = 5 tons 4 cars f. For Japan, what is the opportunity cost of 1 ton of grain (show your work) OC 1 ton = 4 cars 5 tons = 1.25 tons x 100 mill. workers = 0.8 cars x 100 mill. workers

9. g. Which country has the absolute advantage for cars? …..grain? Explain w/ # • Absolute advantage for cars = • No one – each input produces same output • Absolute advantage for grain= • US – each(same) input produces more output

10. h. Which country has the comparative advantage for cars? …..grain? Explain w/ # • Comp. adv cars = • Japan – have lower o.c. of producing cars • Japans oc of 1 car = 1.5 tons vs. US oc of 1 car = 2.5 tons • Comp adv grain = • US – have lower oc of producing grain • US oc of 1 ton grain = .4 cars vs Japans oc of 1 ton grain = .8 cars

11. i. Without trade: ½ of each countries workers produce cars and ½ produce grain. Calculate how many cars and tons of grain are produced by each country. • US • 50 mil x 4 cars = 200 mil cars • 50 mil x 10 tons = 500 mil tons • Japan • 50 mil x 4 cars = 200 mil cars • 50 mil x 5 tons = 250 mil tons • Totals • 400 mil cars and 750 mil tons

12. ….so let’s specialize and trade • US produces only grain = 1 billion tons • Japan produces only cars = 400 million cars • Total world production has increased • Was 400 m cars and 750 m tons • Trade : • US gives up 300 million tons for 200 million cars • Compare to letter ( i )

13. US No trade: 200 m cars 500 m tons Trade: 200 m cars 700 m tons Japan No trade: 200 m cars 250 m tons Trade: 200 m cars 300 m tons