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

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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 mans opportunity cost of washing a car? Who has comparative advantage in washing cars?

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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

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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 WaxingWashing Ted4 cars/hr 12 cars/hr Tom3 cars/hr6 cars/hr

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Solution to problem #1 (3) Applying the above formula, we can also compute Teds 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 – Teds opportunity cost of waxing a car is 3 units of car wash Tom Similarly, Toms 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 – Toms opportunity cost of washing a car is 0.5 unit of car wax

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Solution to problem #1 (4) We can also compute Toms 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 – Toms opportunity cost of waxing a car is 2 units of car wash Who has a comparative advantage in washing cars?

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Solution to problem #1 (5) Comparative advantage – Notion of comparative advantage refers to ones 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 persons, 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

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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.

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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 Apple cider Feta cheese Toby 5gallons/ hr 2.5 ounces/ hr Kyle 3gallons/ hr 1.5 ounces/ hr

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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 – Tobys 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 – Tobys opportunity cost of producing feta cheese is 2 units of apple cider

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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 – Kyles 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 – Kyles opportunity cost of producing feta cheese is 2 units of apple cider

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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

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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.

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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)

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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) Loaves of bread baked per day Dressed sewed per day 32 64 1 2 Slope of the curve = opportunity cost 0

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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 Dresses sewed per day Loaves of bread baked per day 0 64 32

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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.

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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)

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Solution to problem #7 (2) Dresses sewed per day Loaves of bread baked per day 0 32 64 A sewing machine is introduced The productivity has increased from 32 dresses to 64 dresses a day

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Introduction to Macroeconomics Econ 1011

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