ECON 1001 Tutorial 2

Q.1 Suppose that in one hour Lou and Alex can do the following: Whole hour cleaning 3 rooms 5 rooms Whole hour cooking 3 meals 4 meals 0.5 hour, each 1.5 rooms, 1.5 meals 2.5 rooms, 2 meals Which of the following is true? A) Lou has both an absolute and comparative advantage over Alex in both tasks. B) Alex has a comparative advantage over Lou in cleaning. C) Lou has a comparative advantage over Alex in cleaning. D) Lou has a comparative advantage over Alex in cooking. E) Both (b) and (d) are true. Ans: C

Alex Lou 1hour cleaning 3 rooms 5 rooms 1hour cooking 3 meals 4 meals 0.5 hour, each 1.5 rooms, 1.5 meals 2.5 rooms, 2 meals Who has absolute advantage? Compare productivity base on same resources (1 hour) Abs adv in CLEANING == >Lou Abs adv in COOKING == > Lou Possible to have abs adv on BOTH?

Alex Lou 1hour cleaning 3 rooms 5 rooms 1hour cooking 3 meals 4 meals 0.5 hour, each 1.5 rooms, 1.5 meals 2.5 rooms, 2 meals To ‘produce’ 1 room, To ‘produce’ 1 meal, Alex = sacrifice 1 meal Alex = sacrifice 1 room Lou = sacrifice 0.8 meal Lou = sacrifice 1.25 room Who has comparative advantage? Compare OPPORTUNITY COST Comp adv in CLEANING == > Lou Comp adv in COOKING == > Alex Possible to have COMPARATIVE adv on BOTH? NO!? WHY?

Q. 2 Alex and Lou have worked out an efficient arrangement Q.2 Alex and Lou have worked out an efficient arrangement. Under that arrangement, A) Alex and Lou each spend a half hour on cooking and a half hour on cleaning. B) Alex spends all of his time on cleaning, while Lou does all the cooking. C) Lou does all of the cleaning and half of the cooking. D) Lou does all of the household chores. Lou spends all of his time on cleaning, while Alex does all the cooking Ans: E

How much TOTAL OUTPUT if Alex = 1.5 R+1.5 M Lou= 2.5 R+2 M total = 4 R+3.5M B) Alex = 3 R Lou= 4M total = 3 R+4 M Lou: all cleaning+ half cooking.  how much time does it take? Any info? comparable to other options!? D) Alex = 0 R+0 M Lou= 2.5 R+ 2M total = 2.5 R+2 M E) Alex = 3 M Lou= 5 R total = 5 R+3 M

Option Total Output A 4R+3.5M B 3R+4M D 2.5R+2M E 5R+3M Efficient = econ surplus is maximized = cannot increase output of one good without reducing the output of another good ‘efficient’ arrangement among Alex & Lou = largest total output facing constraint (1 hour)  can be achieved by specialization Option Total Output A 4R+3.5M B 3R+4M D 2.5R+2M E 5R+3M How does B compared to E? Is B as efficient as E? Start from B, if Lou reduces the production of M, he can increase 1R. Hence we will have 4R + 3M, which is strictly worse than E.

Q.3 ________ has an absolute advantage for selling cars and __________ has an absolute advantage for selling trucks. Joe; Joe Larry; Ralph Ralph; Larry Joe; Ralph Larry; Joe Ans: b Cars Sold Trucks Sold Larry 10 5 Joe 9 Ralph 3 12

Abs adv in selling trucks Ralph Who has absolute advantage? Compare productivity base on same resources (1 month) Abs adv in selling cars Larry Abs adv in selling trucks Ralph Cars Sold Truck Sold Larry 10 5 Joe 9 Ralph 3 12

Q.4 Joe's opportunity cost of selling a car is ______ than Ralph's, and Joe's opportunity cost of selling a car is ______ than Larry's. less; more more; less less; less more; more None of the above Ans: a Cars Sold Trucks Sold Larry 10 5 Joe 9 Ralph 3 12

In calculating the oppo. Cost Resource used is kept constant To ‘sell’ 1 car, To ‘sell’ 1 truck, Larry = sacrifice 0.5 T Larry = sacrifice 2 C Joe = sacrifice 1 T Joe = sacrifice 1 C Ralph = sacrifice 4 T Ralph = sacrifice 0.25 C Cars Sold Truck Sold Larry 10 5 Joe 9 Ralph 3 12 In calculating the oppo. Cost Resource used is kept constant 1 month’s sale figure

Q.5 ______ should specialize in truck sales and ______ should specialize in car sales. Joe; Ralph Ralph; Larry Larry; Ralph Larry; Joe Ans: b Cars Sold Trucks Sold Larry 10 5 Joe 9 Ralph 3 12

To ‘sell’ 1 car, To ‘sell’ 1 truck, Larry = sacrifice 0 To ‘sell’ 1 car, To ‘sell’ 1 truck, Larry = sacrifice 0.5 T Larry = sacrifice 2 C Joe = sacrifice 1 T Joe = sacrifice 1 C Ralph = sacrifice 4 T Ralph = sacrifice 0.25 C Who has comparative advantage? Comp adv in selling cars  Ralph Comp adv in selling truck  Larry Difficult to find Com. Adv. For 30 persons? Cars Sold Truck Sold Larry 10 5 Joe 9 Ralph 3 12

Q. 6 The diagram shows Sven's Production Possibilities for one day Q.6 The diagram shows Sven's Production Possibilities for one day. Sven could move from the bold PPC to the dashed PPC by A) finding a job that paid a higher wage. B) studying fewer hours but more effectively per hour. C) devoting fewer hours to sleeping D) spending more time on leisure activities. spending more time on the activity for which he has a comparative advantage. Ans: c

What FACTORS can shift the ppf? Resource more resource  outward shift less resource  inward shift Technology improvement backward change  inward shift (rare…) Note that the PPF output is measured as the number of hours spent, not as the number of books read or number of jobs done per day.

In Q, what is the ‘resource’ you use in studying + working? x-axis/ y-axis: measure ‘hours’ i.e. TIME 3 activities: study, work and ?? ZZZ+leisure 24 hours/ day Bold ppc: sleep + leisure = 16 hours Dashed ppc: sleep + leisure = 15 hours

How will each of them affect ppf? finding a job that paid a higher wage. oppo. Cost of studying increase studying fewer hours but more effectively per hour. I) less hour on STUDY II) oppo. Cost of work increase spending more time on leisure activities. less hours on BOTH spending more time on the activity for which he has a comparative advantage. ANY other person? CAN/CANNOT calculate comp. adv?

Q.7 According to Moe's PPF, moving from a grade of 80 in economics to a grade of 90 in economics A) is inefficient B) comes at a lower opportunity cost than moving from a 90 to a 100 in economics. C) is not feasible. comes at a higher opportunity cost than moving from a 90 to a 100 in economics. E) is an increase in efficiency. Ans: b Physics Grade Economics Grade

Point C to D  efficient? points along ppf = different combination of Phy + Econ grades by using ALL available resources (Cannot increase the output of one good without reducing the output of another good.)  equally efficient? When will efficiency be increased? Where are inefficient points?  feasible? Attainable? Where are unattainable points?

Moving from C to D  increase econ by 10 grades  decrease phy by 10 grades (TRADEOFF)  oppo. Cost = 1 econ grade: 1 phy grade Moving from D to E  increase econ by 10 grades decrease phy by 60 grades  oppo. Cost = 1 econ grade: 6 phy grade Physics Grade Economics Grade

Q.8 As soon as you see the other island's PPC you realize coconuts A) there will be no trade because the other island has the same comparative advantage as yours. B) there will be no trade because there is no difference in your ability to harvest coconuts. C) there will be no trade because the other island has an absolute advantage. D) gains from trade will be possible because the opportunity cost of fishing is too high on the other island. your island will have to specialize in coconuts if it wants to gain from trade. Ans: e Home 500 fish 1500 coconuts 500 Foreigner fish 2500

Mutually beneficial trade possible? Yes (different oppo. Cost) Home: Foreigner: 1 F = forgo 0.33 C 1 F = forgo 0.2 C 1 C = forgo 3 F 1 C = forgo 5 F coconuts Mutually beneficial trade possible? Yes (different oppo. Cost) Home: com. Adv in Coconut prduction Foreigner: com. Adv in fishing Home 500 fish 1500 coconuts 500 Foreigner fish 2500

Q.9 When the other island's delegate offers to give you 1,000 fish in exchange for 500 coconuts, you A) accept because you will then have a total of 2,500 fish. B) refuse because your island cannot produce enough coconuts to trade. C) refuse because the trade would leave you at a level of consumption that is less than what you could produce on your own. D) accept because the trade will leave you at a level of consumption that is more than what you could produce on your own. counter, offering to give them 400 coconuts in exchange for 1,000 fish. Ans: c

1,000 fish in exchange for 500 coconuts Exchange ratio= 1 fish : 0.5 coconut accept? (if yes, mutually agreed exchange ratio= ‘terms of trade’) Oppo. Cost for self-producing 1 fish = 0.33 coconut Cheaper to self-produce OR trade? If trade, use 500C (use up all resources) to get 1000 fish, where is this point on ppf? coconuts Home 500 1000 fish fish 1500

Q.10 The fundamental reason the production possibilities curve has a downward slope is A) workers are inefficient. B) resources are of low quality. C) resources are fixed and therefore tradeoffs must be made. D) it has empirical support but why it is so is still a mystery. E) companies are reluctant to fully exhaust their resources. Ans: c

Why ppf is download sloping? Tradeoff Due to LIMITED resources, When increase production of good X Must sacrifice some production of good y Why some ppf are curve while some are straight lines? Slope of ppf = oppo. Cost of producing 1 more unit of good x when does oppo. Cost change ALONG ppf?

workers are inefficient. resources are of low quality. Same options, can only give rise to a poorer tech in production but not explaining tradeoff it has empirical support but why it is so is still a mystery. Why does tradeoff exist?  scarcity companies are reluctant to fully exhaust their resources. i.e. Production points lie INSIDE ppf