9. Mike and Sandy are two woodworkers who both make tables and chairs. In 1 month, Mike can make 4 tables or 20 chairs, where Sandy can make 6 tables or 18 chairs. What is the opportunity cost of 1 chair? a. 1/5 table for Mike and 1/3 table for Sandy b. 5 tables for Mike and 3 tables for Sandy. C. 1/3 table for Mike and 1/5 table for Sandy. d. 3 tables for Mike and 5 tables for Sandy. Amount produced in 160 hours: Table 3-3 Labour Hours needed to make one unit of: Quilts Quilts 40 Helen Carolyn Dresses 10 16 Dresses 16 10 80 2
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Problem
#1 ( Budget Lines) :
Suppose that Russ has budgeted $20 a month to buy candy bars, music downloads, or
some combination of each. If Russ buys only candy bars he can obtain 40 bars a month; if
he buys only downloads, he can buy 20 a month.
1. What is the price of a candy bar?
2. What is the price of a music download?
3. What is the opportunity cost of a music download?
4. What is the opportunity cost of a candy bar?
5. Would the opportunity cost of each good change if Russ decided to increase his
monthly budget to $30 for the two items?
Problem #2 ( Production Possibilities ):
Suppose that a nation's production possibilities can be represented by the table below:
Production Alternatives
| Product Alternatives | |||||
| Products | A | B | C | D | E |
| Food | 0 | 4 | 8 | 12 | 16 |
| Clothing | 20 | 18 | 14 | 8 | 0 |
Products A B C D E
Food 0 4 8 12 16
Clothing 20 18 14 8 0
1. What is the maximum amount of food this economy can produce? How much clothing
can it produce at this point?
2. If the economy is producing at alternative C, what is the cost of one more unit of
food?
3. If the economy is producing at alternative C, what is the cost of one more unit of
clothing?
4. Is this economy subject to the law of increasing opportunity costs? How can you tell?
5. Suppose the economy is currently producing 4 units of food and 16 units of clothing.
Is this economy producing efficiently?
Gain from trade
Consider two neighboring island countries, Arcadia and Felicidad. Each has 72,000 labor hours available per month that it can use to produce jeans, wheat , or a combination of both. The following table shows the amount of labor hours required to produce one pair of jeans or one bushel of wheat.
|
Jeans (Labor hours per pair) |
Wheat (Labor hours per bushel) |
|
| Arcadia | 80 | 16 |
| Felicidad | 24 | 12 |
Initially , suppose Arcadia uses 54,000 hours of labor per month to produce jeans and 18,000 hours per month to produce Wheat, while Felicidad uses 18,000 hours of labor per month to produce jeans and 54,000 hours per month to produce wheat. Consequently, Arcadia produces 675 pairs of jeans and 1,125 bushels of wheat, and Felicidad produces 750 pairs of jeans and 4,500 busheis of wheat. Assume there are no other countries willing to trade goods, so in the absence of trade between the two countries, each country consumes the amount the of jeans and wheat it produces.
Arcadia's opportunity cost of prducing on pair of jeans is (1) ____________ ((5 bushels - 1/2 bushel - 2 bushels - 1/5 bushels )) of wheat, and Felicidad's opportunity cost of producing one pair of jeans is (2)_______________ (( 1/5 bushel - 1/2 bushel - 5 bushels - 2 bushels )) of wheat. Therefore,(3)_____________(( Arcadia - Felicidad )) has a comparative advantage in the production of jeans, and (4)______________(( Arcadia - Felicidad )) has a comparative advantage in the production of wheat.
Suppose that Arcadia completely specializes in the production of the good in which it has a comparative advantage, producing only that good. It will produce (5)____________(( 4500 - 3000 - 6000 - 900 )) (6)______________ ((Bushels of wheat - pairs of jeans )) .
Suppose also that Felicidad does not specialize and uses 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat. It will produce (7) __________(( 900 - 2250 - 3000 )) pairs of jeans and (8)__________(( 1500 - 4500 - 6000 )) bushels of wheat.
Suppose Arcadia and Felicidad agree to trade with each other, exchanging 1,100 pairs of jeans for 3,300 bushels of wheat. In particular, Arcadia will export the goods it produces and Felicidad will expor the goods that Arcadia does not produce.
With trade, Arcadia will (9)____________(( export - import )) jeans and (10)_____________(( export - import )) wheat. Felicidad will (11)__________(( export - import )) jeans and (12)___________(( export - import )) wheat .
When neithen country specializes, the total production of jeans is (13) _____________ (( 5625 - 2250 - 1425 - 6000 )) pairs per month, and the total production of wheat is (14) ___________ ((5625 - 2250 - 1425 - 6000 )) bushels per month .
When Arcadia specializes and Felicidad still produces the combination of goods using 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat, the total production of jeans becomes (15)___________ (( 2250 - 1425 - 5625 - 6000 )) pairs pers month , and the total production of wheat became (16)__________(( 2250 - 1425 - 5625 - 6000 )) bushels per month.
