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1. Explain why the farmers 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.

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Presentation on theme: "1. Explain why the farmers 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."— Presentation transcript:

1 1. Explain why the farmers 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 ranchers 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 Marias 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 US410 Japan 45

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

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 lets 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


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