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**It takes farmer 20 hours to = 1 lb. meat **

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

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**It takes rancher 1 hr to = 1lb meat **

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

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**She can read 100 pg. soc. in 2 hours **

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.

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**1 American worker can produce 4 cars / year **

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

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**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

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**b. graph PPF for US and Japanese economies**

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

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**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 = cars 10 tons = 2.5 tons grain x 100 mill workers = 0.4 cars x 100 mill workers

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**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

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**Absolute advantage for cars = No one – each input produces same output **

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

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**Japan – have lower o.c. of producing cars **

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

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**US 50 mil x 4 cars = 200 mil cars 50 mil x 10 tons = 500 mil tons**

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 5 tons = 250 mil tons Totals 400 mil cars and 750 mil tons

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**….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 )

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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

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© 2007 Thomson South-Western, all rights reserved N. G R E G O R Y M A N K I W PowerPoint ® Slides by Ron Cronovich 3 E S S E N T I A L S O F F O U R T.

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