1. ECON 1001
Tutorial 2

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

3. 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?

4. 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?

5. 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

6. 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

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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.

16. 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

17. 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?

18. 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

19. 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?

20. 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

21. 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

22. Mutually beneficial trade possible? Yes (different oppo. Cost)
Home: Foreigner: 1 F = forgo 0.33 C F = forgo 0.2 C 1 C = forgo 3 F 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

23. 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

24. 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

25. 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

26. 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?

27. 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