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Chapter 3

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McMaster University

Economics

ECON 1B03

Hannah Holmes

Winter

Description

INTERDEPENDENCE AND THE
GAINS FROM TRADE
3
Problems and Applications
1. In the text example of the farmer and the rancher, the farmer's opportunity cost of producing
one kilogram of meat is 4 kilograms of potatoes because for every 8 hours of work, he can
producing a kilogram of meat means he gives up the opportunity to produce 4 kilograms ofal,
potatoes. Similarly, the rancher's opportunity cost of producing one kilogram of meat is 2
kilograms of potatoes because for every 8 hours of work, she can produce 24 kilograms of meat
or 48 kilograms of potatoes. With limited time at her disposal, producing a kilogram of meat
means she gives up the opportunity to produce 2 kilograms of potatoes.
2. a. See Figure 2. If Maria spends all five hours studying economics, she can read 100
pages, so that is the vertical intercept of the production possibilities frontier. If she
spends all five hours studying sociology, she can read 250 pages, so that is the
is a straight line.t. The time costs are constant, so the production possibilities frontier
Figure 2
b. It takes Maria two hours to read 100 pages of sociology. In that time, she could read 40
economics.conomics. So the opportunity cost of 100 pages of sociology is 40 pages of
34 35 ✦ Chapter 3/Interdependence and the Gains from Trade
3. a.
Workers needed to make:
One Car One Tonne of Grain
Canada 1/4 1/10
Japan 1/4 1/5
b. See Figure 3. With 100 million workers and four cars per worker, if either economy were
devoted completely to cars, it could make 400 million cars. Since a Canadian worker can
produce 10 tonnes of grain, if Canada produced only grain it would produce 1,000 million
tonnes. Since a Japanese worker can produce 5 tonnes of grain, if Japan produced only
grain it would produce 500 million tonnes. These are the intercepts of the production
possibilities frontiers shown in the figure. Note that since the tradeoff between cars and
grain is constant, the production possibilities frontier is a straight line.
Figure 3
c. Since a Canadian worker produces either 4 cars or 10 tonnes of grain, the opportunity
cost of 1 car is 2½ tonnes of grain, which is 10 divided by 4. Since a Japanese worker
produces either 4 cars or 5 tonnes of grain, the opportunity cost of 1 car is
1 1/4 tonnes of grain, which is 5 divided by 4. Similarly, the Canadian opportunity cost
of 1 tonne of grain is 2/5 car (4 divided by 10) and the Japanese opportunity cost of 1
tonne of grain is 4/5 car (4 divided by 5). This gives the following table:
Opportunity Cost of:
1 Car (in terms of tonnes 1 Tonne of Grain (in terms
of grain given up) of cars given up)
Canada 2 1/2 2/5
Japan 1 1/4 4/5
d. Neither country has an absolute advantage in producing cars, since they're equally
productive (the same output per worker); Canada has an absolute advantage in
producing grain, since it is more productive (greater output per worker). Chapter 3/Interdependence and the Gains from Trade ✦ 36
e. Japan has a comparative advantage in producing cars, since it has a lower opportunity
cost in terms of grain given up. Canada has a comparative advantage in producing
grain, since it has a lower opportunity cost in terms of cars given up.
f. With half the workers in each country producing each of the goods, Canada would
produce 200 million cars (that is 50 million workers times 4 cars each) and 500 million
tonnes of grain (50 million workers times 10 tonnes each). Japan would produce 200
million cars (50 million workers times 4 cars each) and 250 million tonnes of grain (50
million workers times 5 tonnes each).
g. From any situation with no trade, in which each country is producing some cars and
some grain, suppose Canada changed 1 worker from producing cars to producing grain.
That worker would produce 4 fewer cars and 10 additional tonnes of grain. Then
suppose Canada offers to trade 7 tonnes of grain to Japan for 4 cars. Canada will do this
because it values 4 cars at 10 tonnes of grain, so it will be better off if the trade goes
through. Suppose Japan changes 1 worker from producing grain to producing cars.
That worker would produce 4 more cars and 5 fewer tonnes of grain. Japan will take the
trade because it values 4 cars at 5 tonnes of grain, so it will be better off. With the trade
and the change of 1 worker in both Canada and Japan, each country gets the same
amount of cars as before and both get additional tonnes of grain (3 for Canada and 2 for
Japan). Thus by trading and changing their production, both countries are better off.
4. a. Pat's opportunity cost of making a pizza is 2.5 litres of root beer, since she could brew
2.5 litres in the time (2 hours) it takes her to make a pizza. Pat has an absolute
advantage in making pizza since she can make one in two hours, while it takes Kris four
hours. Kris' opportunity cost of making a pizza is 2/3 litres of root beer, since she could
brew 2/3 of a lire in the time (4 hours) it takes her to make a pizza. Since Pat's
opportunity cost of making pizza is less than Kris's, Pat has a comparative advantage in
making pizza.
b. Since Pat has a comparative advantage in making pizza, she will make pizza and
exchange it for root beer that Kris makes.
c. The highest price of pizza in terms of root beer that will make both roommates better off
is 2/3 of a litre of root beer. If the price were higher than that, then Kris would prefer
making her own pizza (at an opportunity cost of 2/3 of a litre of root beer) rather than
trading for pizza that Pat makes. The lowest price of pizza in terms of root beer that will
make both roommates better off is 2.5 litres of root beer. If the price were lower than
that, then Pat would prefer making her own root beer (she can make 2.5 litres of root
beer instead of making a pizza) rather than trading for root beer that Kris makes.
5. a. Since a Canadian worker can make either two cars a year or 30 tonnes of wheat, the
opportunity cost of a car is 15 tonnes of wheat. Similarly, the opportunity cost of a
tonne of wheat is 1/15 of a car. The opportunity costs are the reciprocals of each other.
b. See Figure 4. If all 10 million workers produce two cars each, they produce a total of 20
million cars, which is the vertical intercept of the production possibilities frontier. If all 10
million workers

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