Economics - Assignment #3 Answers

1. Under what conditions is the production possibilities frontier linear rather than bowed out? The production possibilities frontier is linear rather than bowed out, if the opportunity cost of producing a good/service is constant, at all times, regardless of how much of that good/service is produced. 2. Explain how absolute advantage and comparative advantage differ? Absolute advantage - The ability to produce a good using fewer inputs than another producer. Comparative advantage - The ability to produce a good at lower opportunity cost than another producer. Absolute advantage is when someone has a lower absolute cost when engaging in an activity or can produce more for the same cost. Comparative advantage is when someone has a lower opportunity cost when engaging in an activity, regardless of the absolute cost. 3. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage. - Bob can mow the lawn in just ten minutes, while it takes Jenifer twenty minutes. And Bob can do all the laundry in three hours, while it takes Jenifer four hours. - Bob has an absolute advantage in both mowing the lawn and doing the laundry, but Jenifer has a comparative advantage in doing the laundry (the laundry takes the same amount of time as 12 loads, while it takes Bob 18 loads of laundry worth of time). 4. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to question 3. Comparative advantage is more important in trade as there is the opportunity cost is more efficient compared to comparative advantage. Furthermore, this benefits the overall economy. 5. If two parties trade based on comparative advantage and both gain, in what range must the price of trade lie? If two parties trade based on comparative advantage, and in order for both parties to gain from the tarde, they must lie between the two opportunity costs. 6. Will a nation tend to export or import more goods for which it has a comparative advantage? If a country had a comparative advantage in the trade, meaning they produce a good with a lower opportunity cost, however, when there is no comparative advantage for them that means production costs are higher a country will import from other countries. Just like the situation in the video that Mr. Faz showed the class, with the train and car situation, the US are giving up planes, where Canada is giving up trains. This is the main theme between all of these questions - trade can make everyone better. 7. Why do economists oppose policies that restrict trade among nations? Economists tend to oppose policies that restrict trade among nations, as free trade allows for both countries involved in this trade, to benefit from the principles of comparative advantage. Problems and Applications - It would take Maria 2 hours to read 100 pages of sociology, and furthermore, in these 2 hours of reading, she could also read 40 pages of economics. = As a result, the opportunity cost of Maria reading 100 pages of sociology, is reading 40 pages of economics. A) Pat has the absolute advantage, and also the comparative advantage. This is because the production amount of Pat is much faster than Kris’s production amount. B) Kris makes the rootbeer, in exchange for Pat’s Pizza. C) 2  /3 of a gallon, above this price Kris would be better off making his own pizza. The lowest price is 1/2 a gallon, below this price Pat would be able to brew more root beer at the same cost and it would not benefit her at all. #7 Shirts Computers Chinese Worker 100 (0.1) 10 (10) American Worker 100 (0.2) 20 (5) B) If these countries were open to trade, China would make the shirts, in exchange for America’s Computers. C) The most is 10 shirts for 1 Computer, and the least 5 shirts for 1 computer. D) If both America and China produce the same exact product at the same time, there would be no need for trading at all, since neither countries would benefit each other in any way. As a result this would be inefficient. 9. A) True: Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of goods. B) False: It is not true that some people always have a comparative advantage in everything they do - this just isn't realistic. C) False: It is not true that if a trade is good for one person, it is always good for the other person involved. D) False: For a trade to be good for both parties involved, the trade price must lie between the two opportunity costs. E) False: Trade that makes a country better off can easily harm certain individuals in the country, or the environment as a whole.