4. Your roommate Pat decides to help with the party. The amounts of brownies and cookies which can be produced in an hour (if all resources are devoted to that good) are shown by the following table:
YOU PAT
COOKIES PER HOUR 20 5
BROWNIES PER HOUR 40 20
Where both cookies and brownies are measured in units.
a. Who has an absolute advantage in producing brownies? Cookies?
b. For you, what is the opportunity cost of producing one brownie? Of one cookie?
c. For Pat, what is the opportunity cost of producing one brownie? Of one cookie?
d. Should you and Pat specialize? Who should produce what?
e. Suppose that you have so many guests that you have to split up the party into two rooms. You throw one party and Pat throws the other. What are the terms of trade? (At what rate would you each be willing to trade?)
f. Using graphs for both you and Pat, show that trade allows each of you to
achieve a point on your consumption possibilities curve which is greater than
your production possibilities curve. Be sure to label all curves and axes.
f. What is this principle called?
4. Your roommate Pat decides to help with the party. The amounts of brownies and cookies which can be produced in an hour (if all resources are devoted to that good) are shown by the following table:
YOU PAT
COOKIES PER HOUR 20 5
BROWNIES PER HOUR 40 20
Where both cookies and brownies are measured in units.
a. Who has an absolute advantage in producing brownies? Cookies?
b. For you, what is the opportunity cost of producing one brownie? Of one cookie?
c. For Pat, what is the opportunity cost of producing one brownie? Of one cookie?
d. Should you and Pat specialize? Who should produce what?
e. Suppose that you have so many guests that you have to split up the party into two rooms. You throw one party and Pat throws the other. What are the terms of trade? (At what rate would you each be willing to trade?)
f. Using graphs for both you and Pat, show that trade allows each of you to
achieve a point on your consumption possibilities curve which is greater than
your production possibilities curve. Be sure to label all curves and axes.
f. What is this principle called?
Related textbook solutions
Related questions
1. Use the table below for the following question. Suppose you have a budget of $6 and that brownies and Twizzlers cost $1 each. What is the consumer optimum?
|
Number of Brownies |
Total Utility of Brownies |
Marginal Utility of Brownies |
Number of Twizzlers |
Total Utility of Twizzlers |
Marginal Utility of Twizzlers |
|
0 |
0 |
- |
0 |
0 |
- |
|
1 |
10 |
10 |
1 |
6 |
8 |
|
2 |
19 |
9 |
2 |
13 |
7 |
|
3 |
26 |
7 |
3 |
19 |
6 |
|
4 |
30 |
4 |
4 |
23 |
4 |
|
5 |
30 |
0 |
5 |
25 |
2 |
|
6 |
29 |
-1 |
6 |
25 |
0 |
| 6 brownies |
| 3 brownies and 3 Twizzlers |
| 4 brownies and 2 Twizzlers |
| any combination of 6 because they're both $1 |
| 8 |
2. Use the table below for the following question. What is the consumer equilibrium for a $6 budget if the price of brownies rises to $1.50 and the price of Twizzlers remains at $1.00?
|
Number of Brownies |
Total Utility of Brownies |
Marginal Utility of Brownies |
Number of Twizzlers |
Total Utility of Twizzlers |
Marginal Utility of Twizzlers |
|
0 |
0 |
- |
0 |
0 |
- |
|
1 |
10 |
10 |
1 |
6 |
8 |
|
2 |
19 |
9 |
2 |
13 |
7 |
|
3 |
26 |
7 |
3 |
19 |
6 |
|
4 |
30 |
4 |
4 |
23 |
4 |
|
5 |
30 |
0 |
5 |
25 |
2 |
|
6 |
29 |
-1 |
6 |
25 |
0 |
| The consumer will buy all Twizzlers because they're cheaper. |
| 4 brownies |
| 3 Twizzlers and 2 brownies |
| 3 brownies and 3 Twizzlers |
| 7 |
3. At Nice Price for the Ice, an ice cream parlor, customers routinely buy a scoop of ice cream for $3. If consumers purchase one scoop of ice cream at $3, then why don't they keep buying more and more scoops for $3 until the store sells out?
| People would not want more than one scoop of ice cream because then they would have less money to spend on other goods. |
| People do not want to consume all the scoops of ice cream because their total utility is higher the less they eat. |
| At some point, customers do not value an additional scoop at $3, so they will not pay $3 for a scoop after they reach that point. |
4. Suppose you plan on eating 50 potato chips. As you start consuming potato chips, your marginal utility is very high, but it begins to fall slowly until you've eaten 10 chips. After you have eaten 10 chips, your marginal utility decreases even faster with each additional chip. The marginal utility continues to decline until you've eaten 49 chips. The fiftieth chip does not give you any additional utility. After 50 chips, your mouth gets so salty that it's unpleasant to eat anymore, so marginal utility is actually negative for those chips. How many chips should you eat in order to maximize your total utility?
| 1 |
| 10 |
| 49 |
5. As you start consuming potato chips, your marginal utility is very high, but it begins to fall slowly until you've eaten 10 chips. After you have eaten 10 chips, marginal utility decreases even faster with each additional chip. The marginal utility continues to decline until you've eaten 49 chips. The fiftieth chip does not give you any additional utility. After 50 chips, your mouth gets so salty that it's unpleasant to eat anymore, so marginal utility is actually negative for those chips. How many chips should you eat in order to maximize your marginal utility?
| 1 |
| 10 |
| 49 |
| 50 |
6. At current levels of consumption, Alice is spending her entire budget. If Alice gets 3 utils of satisfaction per dollar spent on ice cream and 2 utils per dollar spent on shampoo, then how should she adjust her consumption to get closer to the consumer optimum?
| She is already at the consumer optimum, so no adjustment is necessary. |
| She should buy more ice cream and less shampoo. |
| She should buy more shampoo and less ice cream. |
| She should buy more of both goods. |
7. Suppose you are at a restaurant and your favorite dish costs $20. You can get your next-favorite dish for $17. If your next-favorite dish gives you 100 utils, how many additional utils do you need from your favorite dish to spend the extra $3?
| 15 |
| 17.65 |
| 85 |
| 117.65 |
8. The diamond water paradox is the observation that water is essential to life and inexpensive, while diamonds are not essential and are highly-priced. Which of the other pairs of goods exhibit a pricing structure similar to water and diamonds?
| economy & luxury cars |
| rice & truffles (very expensive mushrooms) |
| paper clips & gasoline |
| paper & textbooks |
9. Rice is a cheap staple food eaten several times a day by many people all over the world. In Trufflelandia, residents also eat expensive mushrooms known as truffles once every year as a birthday celebration. Rice keeps the people alive and truffles are not necessary for sustaining their lives. Why is rice so cheap and truffles so expensive?
| Truffles taste better, so they are worth more money. |
| Rice is easy to cook, so people buy a lot of it. If people are going to buy so much, then it has to be cheap. |
| Truffles are more nutritious, and healthy food is always more expensive than unhealthy food. |
| People eat so much rice that an additional serving of rice has little marginal value, but the marginal value of another serving of truffles is very high. |
TITLE: BENEFITS OF TRADE Trade among nations has been growing faster than the total world GDP. The growth of U.S. exports and imports relative to the U.S. GDP parallels this global trend. Today, exports constitute more than 10 per cent of total national production. In some countries, trade accounts for a much higher share of total economic activity.
Tasks: Consider the table below for the neighbouring nations of Northland and West Coast. The table lists the maximum feasible hourly rates of the production of pastries if no sandwiches are produced and the maximum feasible hourly rates of the production of sandwiches if no pastries are produced. Assume that the opportunity costs of producing these goods are constant in both nations.
| Product | Northland | West Coast |
|---|---|---|
| Pastries (per hour) | 50,000 | 100,000 |
| Sandwiches (per hour) | 25,000 | 200,000 |
a. Based on the data provided, what is the opportunity cost of producing pastries and sandwiches in Northland?
b. What is the opportunity cost of producing pastries and sandwiches in West Coast?
c. Which nation has a comparative advantage in producing pastries and which nation has a comparative advantage in producing sandwiches?
d. Suppose the two nations choose to specialize in producing the goods for which both have a comparative advantage. Both agree to trade at a rate of exchange of one pastry for one sandwich. At this rate of exchange, what are the maximum numbers of pastries and sandwiches that both could agree to trade?
