1. Who has has the lowest lowest opportunit opportunity y cost?
Maria Maria and and Felix need need to to decid decide e which which one of them them will take time off of work to complete complete the rather rather urgen urgentt task task of diggin digging g post post holes holes for their their new fence fence.. Maria Maria is pretty pretty good good with a post post auge auger; r; she can can dig the holes holes in 30 minutes minutes.. Felix Felix is somew somewhat hat slow; slow; it takes takes him 5 hours hours to dig the holes holes.. Maria Maria earns earns $160 $160 per per hour hour as a psychia psychiatrist trist,, while while Felix Felix earns $20 per hour as a cobbler. Keepi Keeping ng in mind mind that that either either Maria Maria or Felix must must take take time time off from work work to dig the holes holes,, who who has has the lowest lowest opportun opportunity ity cost of completing completing the task?
o
Maria and Felix Felix face face identical identical opportunity opportunity costs
'" @ Maria
o Felix
Explanation:
Close
A
If Maria Maria decid decides es to dig the holes, holes, she gives gives up the $80 $80 she could could have earned earned workin working g as a psychia psychiatris tristt in the same same 30 minutes minutes.. If Felix Felix decide decides s to dig the holes holes,, he gives gives up the $100 $100 he could could have earned earned working working as a cobb cobbler ler in the same 5 hours. hours. Since Maria Maria gives gives up the least, she has has the the lowest lowest opportunity opportunity cost of digging digging post holes for for their new fence.
Scores:
.:. .:. Aver Averag age: e: 1 / 1
2. Unde nderstand rstanding ing
oppo opportu rtunity nity
cost cost
You You work work as an assista assistant nt coach on the university university basketb basketball all team and earn earn $15 per hour. hour. On One e day, day, you decide decide to skip skip the hour-lo hour-long ng practic practice e and go to the movies movies instead, instead, which which has an $10 admission admission fee. The opportu opportunity nity cost cost of skippin skipping g practic practice e and going going to the movies, movies, valued valued in dollars dollars,, is
$25 ' " . CLose
ExpLanation:
A
When When you measure measure the opportunit opportunity y cost cost of a choice choice in dollars, dollars, you include any actual actual monetar monetary y amount amount paid (the (the explici explicitt cost) cost) and the monetar monetary y value value of any other other sacrific sacrifices es made (the implici implicitt cost). cost). By skipp skipping ing practice practice,, you forgo earn earning ing your your hourl hourly y wage wage of $15 per hour, hour, so this this is your your impli implici citt cost. cost. You also also choos choose e to pay pay $10 to get into the movies movies,, so this is your your explici explicitt cost. cost. So your your opportu opportunity nity cost cost in dollars, dollars, the sum of your your explici explicitt and implic implicit it costs, costs, is $15 + $10
=
$25.
Scores:
.:. .:. Aver Averag age: e: 1 /1
3. Efficiency fficiency in the production possibilities model model
Suppos Suppose e the United United Kingdom Kingdom produc produces es barley barley and cars. cars. Its current current producti production on possibi possibilitie lities s frontier frontier (PPF (PPF)) is shown shown on the diagram diagram below, below, along with with six output output combina combination tions s labeled labeled A throug through h F.
CARS (Million (Millions s
per year)
100
80 C
X
60
F
40
0
X
X
A X
20 PPF X
B E
X a
20
40
BARLEY
60
80
100
[MiLLions [MiLLions ot bushels bushels per year)
I Clear All I I Help I
Which Which of the points points on the graph graph repres represent ent output output combina combination tions s that are inefficie inefficient? nt?
A and S only Clos Closee /\. /\.
Explanation:
The produ productio ction n possibi possibilitie lities s frontier frontier shows shows all all efficient efficient output output combina combination tions s for the United United Kingdom; Kingdom; that is, combina combination tions s of output output that use all all the nation's nation's availab available le resour resources ces and and technolo technology gy to their their maximu maximum m potentia potential. l. Points Points located located below t he PPF, such such as A and S, represent represent inefficient output output combina combination tions. s. At these these points, points, it is possibl possible e to increas increase e the product production ion of both goods becau because se resourc resources es are unempl unemploye oyed. d. For exampl example, e, point point A is ineffici inefficient ent becaus because e it is poss possible ible for the United United Kingdom Kingdom to produc produce e instead instead at point point F, where where the economy economy is producing both more barley and more cars.
Which Which of the points points on the graph graph repres represent ent output output combina combination tions s that are efficien efficient? t?
E and and F only only
Explanation:
Clos Closee /\. /\.
The produ productio ction n possibi possibilitie lities s frontier frontier shows shows all efficien efficientt output output combina combination tions s for the United United Kingdom; Kingdom; that is, combina combination tions s of output output that use all the nation's nation's availab available le resour resources ces and and technol technology ogy to their their maximu maximum m potentia potential. l. Points Points located located on the PPF, such such as E and F, represe represent nt efficient output combina combination tions. s. At these these points, points, it is imposs impossible ible to to increas increase e the produc production tion of one good without without produci producing ng less less of the other. For insta instance nce,, if the United United Kingdo Kingdom m is curren currently tly produci producing ng at point point F and decid decides es that it wants wants to produc produce e more barley, barley, it must must produce produce fewer fewer cars.
c o
e po n s on
e grap
represen ou pu com na o on ns
an
a are una a na e
on y
Explanation:
Close
A
The produ productio ction n possibi possibilitie lities s frontier frontier shows shows all all efficient efficient output output combina combination tions s for the United United Kingdom Kingdom;; that is, combin combinatio ations ns of output output that use all the nation's nation's available available resources resources and and technolo technology gy to their maximu maximum m potentia potential. l. above the PPF, such Points Points located located above such as C and D, repres represent ent output output combina combination tions s that are unattainable given current
resour resources ces and techno technology logy.. Recall Recallthat that each each point point on the PP PPF Fshows shows the the maximu maximum m quantity quantity of barley barley the United United Kingdo Kingdom m can can produce produce if it also also wants wants to produc produce e the given given quantity quantity of cars. For exampl example, e, compar compare e point point F (40 million million cars cars and 40 million million bushels bushels of barley) barley) with point point D (40 (40 million million cars cars and 66 million million bushels bushels of barley). barley). Becau Because se point point F is on the United United Kingdo Kingdom's m's PPF,we PPF,we know that that if the United United Kingdo Kingdom m is producing producing 40 million million cars, cars, it can produc produce e at most most 40 million million bushels bushels of barley; barley; therefor therefore, e, point point D must must be unattain unattainable able given given current current resourc resources es and techno technology logy..
Scores:
3
-
-
.:. Average: 3/3
4. The opp oppor ortun tunity ity
cost cost of shiftin shifting g
produ productio ction n
choic choice es
19
The graph graph below below shows shows the productio production n possibili possibilities ties frontier frontier (PP (PPF)of F)of an economy economy that produce produces s food and oil. The black black points points (X symbols symbols)) represe represent nt three possible possible output output levels levels in a given given month. month. Youcan You can place place your mouse over over the points to see their exact exact coordinate coordinates. s.
FOOD [Thousands [Thousands of pounds pounds per month) 40
35 30
A )( )(
B C
25
)(
20 15 10
5
0
20
40
60
80
10 0
120
140
160
OIL (Thous (Thousand ands s of barre barrels ls per month) month)
I Clear All I ~
Supposethe Supposethe econom economy y initially initially produces produces 29,000 29,000 pounds pounds of food and 20,000 20,000 barrels barrels of oil, which which is represente represented d by point point A. The oppo opportun rtunity ity cost cost of producing producing an addit additiona ionall 20,000 20,000 barrels barrels of oil (that is, moving producti production on to point point B) is
2,000
pounds of food.
Suppose Suppose instead instead that the econom economy y currently currently produces produces 40,00 40,000 0 barrels barrels of oil and 27,000 pounds pounds of food, which which is represe represented nted by point B. Now Now the opportun opportunity ity cost cost of producin producing g an additiona additionall 20,000 20,000 barrels barrels of oil (that is, moving moving to poin pointt C) is
3,00 ,000
poun ounds of foo food.
ompar ng your answers o barr barrel els s of oil oil at at poin pointt B is refl reflec ects ts the the Explanation:
e wo ques on ons a ov ove, you can see
a
e oppor un y co cos o
,
a
ona
grea greate terr than than >/ the opportun opportunity ity cost of of 20,000 20,000 addition additional al barrels barrels of oil oil at point point A. This This
law law of incr increa easi sing ng oppo opport rtun unit ity y cost costs s
>/.
Close
A
At point point A, the econom economy y produc produces es 29,000 29,000 pounds pounds of food and 20,000 20,000 barrels barrels of oil. At point point B, the econom economy y produces produces 27,000 pounds of food (2,000 fewer pounds than at point A) and 40,000 barrels of oil (20,000 more barrels than at point point A). Therefo Therefore, re, at point point A, the opportu opportunity nity cost cost of 20,000 20,000 addition additional al barrels barrels of oil is 2,000 pounds pounds of food. food. At point point S, the econom economy y produc produces es 27,000 27,000 pounds pounds of food and 40,000 barrels barrels of oil. At point point C, the econom economy y produc produces es 24,000 pounds of food (3,000 fewer pounds than at point S) and 60,000 barrels of oil (20,000 more barrels than at point point B). Ther Therefo efore, re, at point B, the the opportu opportunity nity cost cost of 20,000 20,000 addition additional al barrels barrels of oil is 3,000 3,000 pounds pounds of food. Since Since the opportun opportunity ity cost of of 20,000 20,000 addition additional al barrels barrels of oil starting starting at point point A is 2,000 2,000 pounds pounds of food, food, and the opportu opportunity nity cost of 20,000 20,000 addition additional al barrels barrels of oil starting starting at point B is 3,000 pounds pounds of food, food, the opportun opportunity ity cost of of oil at point B is greate greaterr than the opportu opportunity nity cost of oil at point point A. This reflec reflects ts the fact that in genera general, l, not all resourc resources es are equall equally y well well suited suited to the produc production tion of food and oil. When When the the econom economy y starts produc producing ing oil, it uses uses those those resources resources that that are most most suited suited to oil producti production on as opposed opposed to food produ production ction.. If this economy economy wants wants to produc produce e addition additional al oil, it must start using using resour resources ces that aren't aren't as well well suited to oil produc production tion;; so the opportun opportunity ity cost of the the addition additional al barrels barrels of oil is higher higher than the cost of the initial initial barrels barrels of oil. Therefo Therefore, re, the opportu opportunity nity cost cost of producing additional additional oil increases as more more oil is produced, giving the PPFits PPFits familiar bowed-out bowed-out shape.
Scores:
4
-
-
.: Av Average: 4 /4
5. Shifts i n production production possibilities possibilities
Supposethe Supposethe United United Kingdom Kingdom produces produces both agricult agricultural ural and capital capital goods. goods. The diagram diagram below below shows shows its current current producti production on possibil possibilities ities frontier frontier (PP (PPF)for F)for alfalfa, alfalfa, an agricultura agriculturall good, good, and trucks, trucks, a capital capital good. good. Drag Drag the PP PPF Fto show the effects of a tightening tightening of immigratio immigration n laws laws to allow fewer fewer workers workers into the country. country. Tool Tool tip: tip: Positio Position n your cursor cursor over any dots outlined outlined in red and drag drag to the desired desired position. position. Dots will snap to their new position.
Answer TRUCKS
TRUCKS
IThoLJsand IThoLJsands s per year)
(Thous (Thousand ands s
30
30
20
20
10
10
IIC • • . • •
L'o-l _
o
20
40
I
60
per year) year)
'
lR'_
o
20
I 40
60 A LFA LFA
A LFA LFA
[Milli [Millions ons
Explanation:
[Milli [Millions ons
of bLJshe bLJshels ls per yeaI'I yeaI'I
of bLJshel bLJshels s per yeaI'I yeaI'I
Close
A
Becaus Becauseof eof the tightening tightening of immigration immigration laws, laws, less labor labor is availab available le for the production production of either alfalfa or trucks. trucks. This This decreas decreasesthe esthe maximum maximum amount amount of alfalfa the United United Kingdom Kingdom can produc produce e for any given quantity quantity of trucks, trucks, and decreas decreases esthe the maximum maximum number number of trucks trucks it can produ produce ce for for any given given quantity quantity of alfalfa. For instanc instance, e, if we look at the vertical vertical axis, axis, we can see see that if the United United Kingdom Kingdom produces produces zero zero bushels bushels of of alfalfa, it can initia initially lly produce produce a maximu maximum m of 20,000 trucks per year. year. Becausethe Becausethe tightening tightening of immigratio immigration n laws laws decrease decreases s the amount amount of trucks trucks the United United Kingdom Kingdom can produce, produce, you should should have moved moved the point point to 10,000 10,000 trucks trucks per year. year. Similar Similarly, ly, if we look at the horizon horizontal tal axis, axis, we can see that if the United United Kingdom Kingdom produces produces zero zero trucks, trucks, it can initial initially ly produce produce a maxim maximum um of 40 million million bushels bushels of alfalfa per year. Becausethe Becausethe tightenin tightening g of immigra immigration tion laws decr decrease eases s the amount of alfalfa alfalfa the United United Kingdom Kingdom can produce produce,, you should should have moved moved the point point to 20 million million bushels bushels of alfalfa per year.
Scores:
.: Aver Averag age: e: 1 / 1
19
6. Opportunity pportunity cost cost and and production production possibilities possibilities Natha athan n is a ski skill lled ed toym toymak aker er toys toys.. The The foll follow owin ing g
who who is able able to prod produc uce e both both boat boats s and and puzz puzzle les. s. He has has eigh eightt hour hours s a day day to prod produc uce e
tabl table e show shows s the the dail daily y outp output ut resu result ltin ing g from from vari variou ous s poss possib ible le comb combin inat atio ions ns
Boats
of his his tim time. e.
Puzzles
Hours per per Day
Hours per per Day Day
Producing Boats Boats
Producing Puzzles Puzzles
Produced per Day Day
Produced per Day Day
A
8
0
4
0
B
6
2
3
12
C
4
4
2
19
D
2
6
1
21
E
0
8
0
22
Choice
On the the foll follow owin ing g
diag diagra ram, m, use use the the red red point points s (cro (cross ss symb symbol ol)) to plot plot Natha athan' n's s init initia iall prod produc ucti tion on
poss possib ibil ilit itie ies s
fron fronti tier er
(PPF (PPF). ). Plot Plot you yourr poin points ts in ord order er,, eith either er from from left left to right right or righ rightt to left left.. Line Line segm segmen ents ts will will conn connec ectt the the poin points ts automatically. An sw er PUZ ZZ Z LE LE S
PUZ ZZ Z LE LE S
P ER ER D A Y
40
Initial Initial PPF
35 N ew ew
30
P PF PF
40
"
35 30 25
25 20
PER DA AY Y
< ll
0
20 0
0
0
0 0
0
15
15
0
0
10
10
5
5
- :> 0
2
3
0
0
4
5
6 B O AT AT S
7
0
8
PER DAY
2
3
4
5
6 B O AT AT S
IClearAlll~
8
P ER ER D A AY Y
Clos Closee '"
Explanation:
Each Each row row of the the tabl table e refe refers rs to one one poin pointt on the the prod produc ucti tion on spen spend d all all of his tim time e prod produc ucin ing g his his initi initial al PPF. PPF. Simi Simila larl rly, y,
7
poss possib ibil ilit itie ies s
fron fronti tier er..
For For exa examp mple le,,
if Nat Natha han n choo choose ses s to
boat boats, s, then then he can can prod produc uce e 4 boat boats s and and no puz puzzles zles;; so (4 (4, 0) is one one of the the poin points ts on
if he he spli splits ts his his time time even evenly ly betw betwee een n prod produc ucin ing g
boat boats s and and puzz puzzle les, s, he wil willl prod produc uce e 2 boat boats s and and
19 puz puzzl zles es;; so (2, (2, 19) 19) is anot anothe herr poin pointt on his his initia initiall PPF. PPF.
Supp Suppos ose e Nath Nathan an is curr curren entl tly y
choo choosi sing ng comb combin inat atio ion n
D, prod produc ucin ing g
1 boat boat per per day. day. What hat is his his oppor opportu tuni nity ty
cost cost of
As Nathan increases increases his product production ion of boats, boats, his opportuni opportunity ty cost cost of producin producing g one more more boat increases
". Clos Closee /'\ /'\
Explanation:
At combina combination tion D, Nathan Nathan is producin producing g 1 boat and 21 puzzles puzzles each day. day. Produc Producing ing a second second boat each each day would would require req uire him to move move to combina combination tion C, reduc reducing ing his product production ion of puzzles puzzles to 19 per per day. Since Since this change change involve involves s produc producing ing 21 21 - 19
==
2 fewer fewer puzzles puzzles per day, day, the opportu opportunity nity cost of of producin producing g the second second boat per day is 2 puzzles puzzles
per day. Similarl SimilarlYI YI at combina combination tion C, Nathan Nathan is producing producing 2 boats boats and 19 puzzle puzzles s each each day. day. Produc Producing ing a third boat boat each day would require him to move to combination involves involves produ producing cing 19 - 12
= =
reducing ing 81 reduc
his produc productio tion n of puzzle puzzles s to 12 per day. day. Since Since this this chang change e
7 fewer fewer puzzles puzzles per day, day, the opportun opportunity ity cost of producin producing g the third boat per day is 7
puzzles puzzles per day. day. Nathan's Nathan's opport opportunity unity cost cost of producing producing the second second boat boat per day is 2 puzzles puzzles per day, while the opportunity opportunity cost cost of producin producing g the third boat per day is 7 puzzles puzzles per per day. Hence, Hence, as Nathan Nathan increase increases s his producti production on of boats, his increasin sing g opport opportuni unity ty costs. costs. opportun opportunity ity cost cost of produci producing ng more more boats boats increase increases. s. This This reflects the law of increa
Suppose Suppose Nathan Nathan buys buys a new tool tool that allows allows him to produce produce twice twice as many boats boats per hour as before, before, but doesn't doesn't affect affect his ability ability to produce produce puzzles. puzzles. Use Use the blue points points (circle (circle symbol) symbol) to plot his new PPF PPFon the diagram diagram above. above. Becausehe can now make more boats per hour, Nathan's Nathan's opportu opportunity nity cost of producin producing g puzzles is higher than"
it was previously. previously. Clos Closee /'\ /'\
Explanation:
The new tool causes causes Nathan's Nathan's PPF PPFto pivot pivot to the right. right. In other other words, words, for each point point on his PPF, PPF,the the vertical vertical coordina coordinate te is the same as befor before, e, but the horizon horizontal tal coordina coordinate te is twice twice its initial value. value. For example, example, conside considerr combinati combination on D, in which which Nathan Nathan spends spends 2 hours hours producing producing boats boats and 6 hours hours producin producing g puzzles. puzzles. Befor Before e he bought the new tool, tool, he could could have produced produced 1 boat and 21 puzzles, puzzles, so (1, 21) was a point point on his initial initial PP PPF.W F.With ith the new tool, tool, the same allocatio allocation n of time results results in 2 boats and 21 puzzles, puzzles, so so (2, 21) is a point point on his new PPF. The shift shift in Nathan's PPFis reflected reflected in a corresponding corresponding change in his opportunity costs. Again, Again, consider combination combination D, and and conside considerr the effects effects of moving moving from there there to combina combination tion E. 80th before before and after after Nathan Nathan buys buys the tool, he can produ produce ce 21 puzzles puzzles if he devotes devotes 6 hours hours to produci producing ng them, and 22 puzzles puzzles if he devotes devotes 8 hours hours to producin producing g them. them. Hence, Hence, spending spending his last 2 hours hours producing producing puzzles puzzles results results in 1 additiona additionall puzzle. puzzle. Befor Before e he bought bought the tool, that would would have have meant meant giving up 1 boat; but now that he has the tool, it means means giving giving up 2 boats. boats. Therefor Therefore, e, Nathan's Nathan's increased increased ability ability to produce produce boats increase increases s his opportu opportunity nity cost of produci producing ng puzzles. puzzles.
Scores:
6
-
.:. Averag Average: e: 6/6
conomic growth growth 7. Economic
and PPFs
The The blue blue curv curve e on the the grap graph h belo below w show shows s the the curr curren entt prod produc ucti tion on
poss possib ibili iliti ties es fron frontie tierr
(PPF (PPF)) for for the econ econom omy y of
Wilsh ilshir ire, e, whil while e the the red red curv curve e show shows s the the PP PPFfor Ffor Wilshi ilshire re next next year year if the the econ econom omy y were were to opera operate te at point point B toda today. y.
CON NS S U M PT PT IO IO N
G O OD OD S
A -
- > .c
PPF
I B -- .• .----X I
I
I
I
I
I
I
I I
- -1 -- - - -
I I
Next Year
C r--~
I I
I PPF I Today
C A P IT IT A L G O O D S
Supp Suppos ose e that that this this year, year, the econ econom omy y is oper operati ating ng at point point B, and and a tech techno nolog logica icall prod produc ucti tion on of eith either er capi capita tall good goods s or cons consum umpt ptio ion n
good goods s with with the the same same reso resour urce ces. s. On the the foll follow owin ing g grap graph, h, the the PP PPF F
that that best best des descr crib ibes es the Wil Wilsh shir ire e econ econom omy y next next yea yearr is the same same as on the graph graph abov above.) e.)
adva advanc nce e occu occurs rs that that enab enables les grea greater ter
PPF3 PF3 (gre (green en line line))
. (Not (Note: e: The blue blue and and red red PPFs PFs are are
CONS CONSUM UMPT PTION ION
l
GOOD GOODS S
PPF TodilY
PPFl
I PPF2 CAPI CAPITA TAL L
PPF3
'-GOODS GOO DS
Close
Explanation:
A
An economy economy faces the tradeoff tradeoff between between current current productio production n of consump consumption tion goods goods and current current producti production on of capital capital goods. goods. The more more resourc resources es an economy economy devotes to produci producing ng consum consumption ption goods, goods, the higher higher the standard standard of living living now, now, but the fewer capital capital goods it can produce produce today. today. Greater Greater capital, capital, howeve however, r, is one one of the major major sources sources of econom economic ic growth. growth. Therefo Therefore, re, you can expect expect an otherwi otherwise se identical identical economy economy to grow more qui quickly ckly when it produce produces s more capital. Becaus Becausecapital ecapital is itself itself a resource, resource, this economy economy will have have more resources resources in the future future as a result result of the technological technological innovation. Therefore, Therefore, the appropriate PPFis PPFis the one further further out than the red PPF,namely PPF,namely PPF3.
Scores:
•:. •:. Aver Averag age: e:
1/ 1
8. Specializa pecialization tion and production production possibilities possibili ties
Suppose Suppose France France produces produces only cars and trucks. trucks. The resources resources that are used in the production production of these two goods are not speCiali speCialized zed-tha -thatt is, the same same set of resour resources ces is equally equally useful useful in produc producing ing each each good. The graphs graphs below show two possible possible PPFsfor PPFsfor France's France's econom economy, y, a straight line PPF(PPF1 PPF(PPF1)and )and a bowed bowed out PP PPF F PPF F2)' (PP Graph 2
Graph Graph 1
TR UCKS
T RUCK S
PPF2
PPFl
CARS
CARS
Basedon Basedon the above above descri descriptio ption, n, the tradeoff tradeoff France France faces faces between between produc producing ing trucks trucks and cars cars is best best repres represent ented ed by Graph
1
The shap shape e of the PP PPFr Frefle eflects cts the fact that that as France France prod produce uces s more more cars cars and fewer fewer trucks, trucks, the opportu opportunity nity cost cost of prod produc ucin ing g each each addit additio iona nall car car Explanation:
consta tant nt.. ..// rema remains ins cons
.
Close
A
You You are told told in this proble problem m that that the same same set of resource resources s is equall equally y useful useful in produc producing ing each each go good. od. Thus, Thus, if France France decide decides s to produc produce e more cars and and fewer fewer trucks, trucks, the resour resources ces that that it uses uses to produc produce e the additio additional nal cars cars will will be as well well suited suited to the produc production tion of cars as the resour resources ces already already being being used in car productio production. n. Therefo Therefore, re, the opportu opportunity nity cost of producing producing each additiona additionall car remains constant as more cars are produced. The opportu opportunity nity cost cost of produc producing ing cars is reflected reflected in the slope slope of the PP PPF.If F.If the PP PPFis Fis flatte flatter, r, produc producing ing an addition additional al car requ requires ires giving up fewer fewer trucks. trucks. If the PP PPFi Fis s steeper steeper,, produc producing ing an addition additional al car requires requires giving up more trucks. trucks. In this case, beca because use the opportu opportunity nity cost cost of produc producing ing additio additional nal cars cars remains remains consta constant nt as more more resour resources ces are shifted shifted to the produc production tion of cars, cars, the slope slope of the PP PPFm Fmust ust remain remain constan constantt as France France produc produces es more trucks trucks and fewer fewer cars. cars. Therefo Therefore, re, the tradeo tradeoff ff France Franceface faces s between between produc producing ing trucks trucks and cars cars is best represen represented ted by Graph Graph 1.
Comparative 9. Comparative
and absolute advantage advantage
Nathan Nathan and and Ginny Ginny run a catering catering busines business s in which they have have two major major tasks: tasks: getting getting new clien clients ts and preparing preparing food for events events and parties parties.. It takes takes Nathan Nathan 12 hours hours to prepare prepare the food for an event and 3 hours hours of effort to get each each new clien client. t. For Gin Ginny, ny, it takes takes 8 hours to prepare prepare food food for an event event and 4 hours hours to get a new client. client. In this scenario,
Ginny"
has an absolut absolute e advant advantage age in food prepara preparation tion,, and __ G_ G_in_ in_n_y __ n_y has a compar comparativ ative e
advantage in food preparation. Clos Close e
Explanation:
/\. /\.
Ginny Ginny has has an absol absolute ute advantag advantage e in food food prepara preparation tion becaus because e she can do do it in less time (8 hours) hours) than Nathan Nathan can can (12 hours). hours). Gin Ginny ny also also has a comparat comparative ive advanta advantage ge in food preparatio preparation, n, becaus because e her opport opportunit unity y cost cost of prepari preparing ng food for one more event event (2 new clien clients) ts) is lower lower than Nathan Nathan's 's opportunit opportunity y cost cost of preparin preparing g food for one more event event (4 new clients).
Suppos Suppose e that initially initially,, Nathan Nathan and and Ginny Ginny are both splitting splitting both tasks tasks for a large number number of events. events. Then they they decide decide to start start shifting shifting some some work work accord according ing to the principl principle e of compara comparative tive advanta advantage. ge. In particu particular, lar, the person person with with the compar comparativ ative e advanta advantage ge in food prepara preparation tion will will take over over prepari preparing ng food for one more more event, event, and the other person person will will use the freed-u freed-up p time to get more more clients. clients. As a result, result, the total number number of events events for which which food is prepare prepared d will rema remain in u unc ncha hang nged ed,, but but the the num numbe berr of new new clie client nts s will will in incr crea ease se by
2"
. Clos Closee /\. /\.
Explanation:
When When Gin Ginny ny (who has a compara comparative tive advanta advantage ge in food preparati preparation) on) takes takes over over preparin preparing g food for one event, event, she has to shift 8 hours hours away from from getting getting clients. clients. This This causes causes Gin Ginny ny to attract attract 2 fewer fewer clients. clients. But by freein freeing g Nathan Nathan from having having to prepare prepare food food for one event, event, Nathan Nathan can can shift shift 12 hours hours to getting new clients. clients. Becaus Because e it takes takes Nathan Nathan 3 hours to get a new client, client, in 12 hours hours he can get 4 new client clients. s. Thus, Thus, Ginny gets gets 2 fewer fewer clients, clients, but Nathan Nathan gets gets 4 more more clients. clients. In the end, new clients clients increase increase by 4 - 2 = 2.
Scores:
3
-
-
•• Average: 3/3
10. 10. Compa Comparative rative advantage dvantage
Jamal Jamal and and Karen are farmers. farmers. Each Each one owns owns a 10-acre 10-acre plot of land. The table below below shows shows the amount amount of alfalfa and corn corn each farmer farmer can produc produce e per year year on a given acre. acre. Both Both farmers farmers can choo choose se whether whether to devote all 10 acres acres to produci producing ng alfalfa, alfalfa, devote devote all 10 acres acres to producing producing corn, or produce produce alfalfa alfalfa on some of their their land and and corn on the rest.
Alfalfa
Corn
(Bushels (Bushels per per acre) acre)
(Bushels per acre)
Jamal
20
5
Karen
12
4
On the following following diagram diagram,, use the red line (cross (cross symbo symbols) ls) to plot Jamal's Jamal's producti production on possibi possibilitie lities s frontier frontier (PP (PPF),and F),and use the blue line (circle (circle symbols symbols)) to plot Karen's PPF PPF..
Answer ALFALFA [Bushels per year]
ALFALFA [Bushels per year)
30 0
300
Jamal' Jamal's s PPF PPF
25 0
250
Karen' Karen's s PPF PPF 200
200
150
150
o
o 100
100 100
50
50
o o
'0
10
20
30
40
; :>
50
60
70
80
CORN IBushels IBushels per year]
o
Clear All J l Help l
10
20
30
J
o
;: >
40
50
60
70
80
CORN [Bushels [Bushels per year!
Close
Explanation:
A
From From the table table above above,, you you can can see that that if Jamal Jamal devot devotes es all 10 acre acres s to produ producin cing g alfalf alfalfa, a, then then he can can produc produce e 10 acres x 20 bushels per acre
=
200 bushe bushels ls of alfalfa alfalfa per year. year. On the the other hand, hand, jf he uses uses all 10 acres acres to produ produce ce
corn, then he can produce 10 acres x 5 bushels per acre = 50 bushels of corn per year. Therefore, his PPFextends PPFextends from (0, 200) to (50, 0). Similar Similar calculatio calculations ns for Karen Karen show show that that if she devotes devotes all of her land to producin producing g alfalfa, alfalfa, then she can produce produce 120 bushels bushels of alfalfa per year. year. On the other other hand, hand, if she uses all 10 acres acres to produce produce corn, corn, then she can produ produce ce 40 bushels bushels of corn per per year. year. Therefore, Therefore, her PPF PPFextends extends from (0, 120) 120) to (40 (40,, 0). Notice Notice that that both PP PPFs Fsare are linear linear because because there there is a constant constant tradeoff tradeoff between between the two goods. goods.
ama
as an a so so u e a va van age n
e pr pro uc uc on on o a a a an
ama
as an a so so u e a va van age n
the producti production on of corn. corn. Close
Explanation:
A
Someone Someone has an absolu absolute te advantage advantage in the producti production on of a good if he or she can can produce produce a unit of output output using using fewer fewer resourc resources es than someon someone e else. Here, the only resourc resource e we are consideri considering ng is land. Jamal Jamal needs needs 1/20 of an acre to produce produce a bushel bushel of alfalfa, alfalfa, and Karen Karen needs 1/12 of an acre to produce produce the same same amount. amount. Therefo Therefore, re, Jamal Jamal has an absolute absolute advanta advantage ge in the producti production on of alfalfa. alfalfa. Likewi Likewise, se, Jama Jamall needs 1/5 1/5 of an acre to produce produce a bushel of of corn, corn, and Karen needs needs 1/4 of an acre acre to produce produce the the same same amount. amount. Therefo Therefore, re, Jamal Jamal has an absolute absolute advanta advantage ge in the producti production on of corn.
Jama Jamal's l's oppor opportun tunity ity cost cost of of produ producin cing g 1 bus bushe hell of cor corn n is cost cost of prod produc ucin ing g 1 bush bushel el of corn corn is of prod produc ucin ing g corn corn than than Kar Karen en,,
Kare Karen n
4 bush bushels els of alfalf alfalfa a
3 bush bushel els s of alfa alfalf lfa a
, wher wherea eas s Kare Karen's n's oppor opportun tunity ity
. Becau ecauseJ seJam amal al has has a
high higher er
oppo opport rtun unit ity y cost ost
has has a comp compar arat ativ ive e adva advant ntag age e in the the prod produc ucti tion on of of corn corn and and
Jama Jamall
has a compara comparative tive advantag advantage e in the producti production on of alfalfa. Explanation:
Close
A
For each acre Jamal Jamal uses to produce produce corn, corn, he produces produces 5 bushels bushels of corn corn per year. But using using that acre acre to produce produce corn means means he must must forgo the 20 bushels bushels of alfalfa alfalfa he could could have produced produced on that land. land. Therefo Therefore, re, Jamal's Jamal's opportun opportunity ity cost cost of producin producing g 5 bushels bushels of of corn corn is 20 bushels bushels of of alfalfa, so the opportunity opportunity cost cost of producing producing each bushel bushel of corn is 20 bushels bushels of alfalfa / 5 bushels bushels of corn = 4 bushels bushels of of alfalfa alfalfa per bushe bushell of corn. corn. (Note (Note also that the slope slope of Jamal's Jamal's PPFis PPFis -4.) By the same logic, logic, Karen Karen could could use an acre of land to produce produce either either 4 bushels bushels of corn or 12 bushels bushels of alfalfa, alfalfa, so her opportun opportunity ity cost cost of producin producing g corn is 12 bushe bushels ls of alfalfa / 4 bushels bushels of corn = 3 bushels of alfalfa per bushel of corn. corn. (Ag (Again, ain, note that the slope slope of Karen's Karen's PPF PPFis -3.) Someone Someone has a compa comparati rative ve advanta advantage ge in producin producing g a good if they can produ produce ce it at a lower lower opportun opportunity ity cost cost than someon someone e else. else. In this case, case, Jamal Jamal has a higher higher opportunity opportunity cost cost of producin producing g corn than than Karen, Karen, so Kare Karen n has a compar comparative ative advantage advantage in the production production of corn. Note Note that the opposite opposite is true true of alfalfa: repeati repeating ng the calculati calculations ons above, above, we can see see that Jamal's Jamal's opportun opportunity ity cost cost of produci producing ng a bushel bushel of alfalfa is 1/4 bushel bushel of of corn, corn, and Karen's Karen's opportun opportunity ity cost cost of producin producing g a bushel of of alfalfa alfalfa is 1/3 bushel bushel of corn. Theref Therefore, ore, Jamal Jamal has a compara comparative tive advantag advantage e in the production of alfalfa. Note Note that although although it is possib possible le for one person person to have have an absolu absolute te advantage advantage in the produc production tion of both goods, goods, it is impossib impossible le for one person person to have have a compara comparative tive advantag advantage e in both goods. goods. Since Since Karen has has a lower opportunity opportunity cost cost of producing producing corn corn than Jamal, it must must be the the case case that Jamal Jamal has a lower lower opportunit opportunity y cost cost of producin producing g alfalfa alfalfa than Karen.
Scores:
9
.: Averag verage: e: 9 /9
