ECON 2020 Lecture Notes - Lecture 4: Absolute Advantage, Opportunity Cost, Comparative Advantage

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cerisegiraffe538

27 Aug 2018

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Econ2020 lecture 4 notes: interdependence & gains from trade (continued) Important to know which good is on each axis: the slope of producers ppf will give the opportunity cost of producing good x, the opportunity cost for a product is the reciprocal of the other. Principle of comparative advantage: each good should be produced by the individual that has the smaller opportunity cost of producing that good. Ex: farmer buys 5 oz of meat with 15 oz of potatoes. This is less than the farmers opportunity cost of producing 1 oz of meat) The farmer will benefit from this! this means: 1 oz of meat is equal to 3 oz of potatoes (15 divided by 5) Tom brady does b/c he can mow his lawn in 2 hours. Gump"s opportunity cost of mowing 1 lawn is . Therefore, forrest gives up less than tom brady would.

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3.In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.

3-1)Who has the absolute advantage in the production of rubber or radios? How can you tell?

3-2)Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios?

3-3)Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber?

3-4)In this example, does each country have an absolute advantage and a comparative advantage in the same good, or not?

3-5)In what product should Japan specialize? In what product should Malaysia specialize?

ket 25) In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps or 7 jackets. Sue's opportunity cost of producing a cap is _0.2 jackets and Tessa's opportunity cost of producing a cap is _0. jackets. risce has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 7 caps, A) 5.0; 10.0; Sue; both Sue and Tessa gain B) 0.2; 0.10; Tessa; both Sue and Tessa gain C) 0.2; 0.10; Sue; Tessa gains but Sue loses D) 0.2; 0.10; Sue; both Sue and Tessa gain E) 5.0; 10.0; Tessa; Sue loses but Tessa gains 10 Sue Tessa 50 70

nathan and Jennifer grow strawberries and raspberries.

Nathan has a comparative advantage in growingstrawberries if

A. Nathan can produce for himself all the fruit he wants.Nathan can produce for himself all the fruit he wants.

B.Nathan's opportunity cost of producing raspberries is greater than Jennifer's opportunity cost of producing raspberries.Nathan's opportunity cost of producing raspberries is greater than Jennifer's opportunity cost of producing raspberries.

C. Nathan can grow more strawberries than Jennifer.Nathan can grow more strawberries than Jennifer.

D.Nathan's opportunity cost of strawberries is less than his opportunity cost of raspberries.Nathan's opportunity cost of strawberries is less than his opportunity cost of raspberries.

If Nathan also has an absolute advantage in growing strawberries and raspberriesâ, he will

A. be a better farmer than Jennifer.be a better farmer than Jennifer.

B. have a comparative advantage one activity but not both.have a comparative advantage one activity but not both.

C.have an equal opportunity cost in all activities.have an equal opportunity cost in all activities.

D.be unable to trade with Jennifer.be unable to trade with Jennifer.

ECON 2020 Lecture Notes - Lecture 4: Absolute Advantage, Opportunity Cost, Comparative Advantage

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