1. Gains from Trade And Specialization Production is determined by who has the least “relative” cost

2. The production possibilities frontier Ch. 3 2 (b) The farmer’s production possibilities frontier Panel (b) shows the combinations of meat and potatoes that the farmer can produce. Panel (c) shows the combinations of meat and potatoes that the rancher can produce. Both production possibilities frontiers are derived assuming that the farmer and rancher each work 8 hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier (c) The rancher’s production possibilities frontier Meat (oz) 0 4 8 Potatoes (oz) 1632 A If there is no trade, the farmer chooses this production and consumption. Meat (oz) 0 12 24 Potatoes (oz) 2448 B If there is no trade, the rancher chooses this production and consumption.

3. The production possibilities frontier 1 3 (a) Production Opportunities Minutes needed to Make 1 ounce of: Amount produced in 8 hours MeatPotatoesMeatPotatoes Farmer Rancher 60 min/oz 20 min/oz 15 min/oz 10 min/oz 8 oz 24 oz 32 oz 48 oz a)What is the minimum price that Rancher would want for 1 oz of Meat? (in oz of Potatoes). I.e., what is R’s opportunity cost of producing 1 oz of Meat? b)What is the maximum price that Farmer would pay for 1 oz of Meat? (in oz of potatoes). I.e., what is F’s opp cost of producing 1 oz of meat..or what would be F’s “avoided” cost if she “buys’ the meat? Opp Cost1oz M1oz P Farmer 1M: 4P -4P-¼ oz M Rancher 1M: 2P -2P* -½ oz M

4. Comparative Advantage – in the Real World 4 Jon Steinsson and Emi Nakamura do not have enough time to do everything they need to do. They’re recently tenured, highly productive rising stars at Columbia University, as well as parents to an infant. But they have a secret weapon helping them prioritize: Econ 101. One of the oldest, if not entirely intuitive, principles in economics is comparative advantage, developed by the British economist David Ricardo in the early 19th century. As introductory econ students all learn, it explains why countries and companies ought to outsource the production of lower-value goods and services, even if they can produce them more efficiently themselves. Even if you’re faster and more effective than everyone else at a given task — fighting with the cable company, say, or folding your socks just so — you still might be better off if you pay someone else to do it for you. Why? Because there is an opportunity cost for every hour http://www.nytimes.com/2013/11/10/magazine/outsource-your-way-to- success.html?_r=0