Transcript Document

ECON 1001
Tutorial 2
Q.1 Suppose that in one hour Lou and Alex can do the
following:
Alex
Lou
Whole hour cleaning
3 rooms
5 rooms
Whole hour cooking
3 meals
4 meals
0.5 hour, each
1.5 rooms, 1.5 meals
2.5 rooms, 2 meals
Which of the following is true?
A) Lou has both an absolute and comparative advantage over Alex
in both tasks.
B) Alex has a comparative advantage over Lou in cleaning.
C) Lou has a comparative advantage over Alex in cleaning.
D) Lou has a comparative advantage over Alex in cooking.
E) Both (b) and (d) are true.
Ans: C
Alex
Lou
1hour cleaning
3 rooms
5 rooms
1hour cooking
3 meals
4 meals
0.5 hour, each
1.5 rooms, 1.5 meals
2.5 rooms, 2 meals
Who has absolute advantage?
Compare productivity base on same resources (1 hour)
Abs adv in CLEANING == >Lou
Abs adv in COOKING == > Lou
Possible to have abs adv on BOTH?
Alex
Lou
1hour cleaning
3 rooms
5 rooms
1hour cooking
3 meals
4 meals
0.5 hour, each
1.5 rooms, 1.5 meals
2.5 rooms, 2 meals
To ‘produce’ 1 room,
Alex = sacrifice 1 meal
Lou = sacrifice 0.8 meal
To ‘produce’ 1 meal,
Alex = sacrifice 1 room
Lou = sacrifice 1.25 room
• Who has comparative advantage?
• Compare OPPORTUNITY COST
• Comp adv in CLEANING == > Lou
• Comp adv in COOKING == > Alex
• Possible to have COMPARATIVE adv on BOTH?
• NO!? WHY?
Q.2 Alex and Lou have worked out an efficient
arrangement. Under that arrangement,
A)
B)
C)
D)
E)
Alex and Lou each spend a half hour on cooking and a half hour
on cleaning.
Alex spends all of his time on cleaning, while Lou does all the
cooking.
Lou does all of the cleaning and half of the cooking.
Lou does all of the household chores.
Lou spends all of his time on cleaning, while Alex does all the
cooking
Ans: E
How much TOTAL OUTPUT if
A) Alex = 1.5 R+1.5 M Lou= 2.5 R+2 M
total = 4 R+3.5M
B) Alex = 3 R
Lou= 4M
total = 3 R+4 M
C) Lou: all cleaning+ half cooking.
 how much time does it take? Any info?
comparable to other options!?
D) Alex = 0 R+0 M
Lou= 2.5 R+ 2M
total = 2.5 R+2 M
E) Alex = 3 M
Lou= 5 R
total = 5 R+3 M
• Efficient
= econ surplus is
maximized
= cannot increase output
of one good without
reducing the output of
another good
Option
A
B
D
E
Total Output
4R+3.5M
3R+4M
2.5R+2M
5R+3M
• ‘efficient’ arrangement
among Alex & Lou
How does B compared to E?
= largest total output
facing constraint (1 hour) Is B as efficient as E?
 can be achieved by
specialization
Start from B, if Lou reduces
the production of M, he can
increase 1R. Hence we will
have 4R + 3M, which is strictly
worse than E.
Q.3 ________ has an absolute advantage for
selling cars and __________ has an absolute
advantage for selling trucks.
Larry
Joe
Cars Sold Trucks
Sold
10
5
9
9
Ralph
3
12
A)
B)
C)
D)
E)
Joe; Joe
Larry; Ralph
Ralph; Larry
Joe; Ralph
Larry; Joe
Ans: b
Who has absolute
advantage?
Cars
Sold
Larry
Joe
Ralph
10
9
3
Truck
Sold
5
9
12
Compare productivity
base on same resources
(1 month)
Abs adv in selling cars
 Larry
Abs adv in selling trucks
 Ralph
Q.4 Joe's opportunity cost of selling a car is
______ than Ralph's, and Joe's opportunity
cost of selling a car is ______ than Larry's.
Cars
Sold
Larry
Joe
Ralph
10
9
3
Trucks
Sold
5
9
12
A)
B)
C)
D)
E)
less; more
more; less
less; less
more; more
None of the above
Ans: a
To ‘sell’ 1 car,
To ‘sell’ 1 truck,
Larry = sacrifice 0.5 T
Joe = sacrifice 1 T
Ralph = sacrifice 4 T
Larry = sacrifice 2 C
Joe = sacrifice 1 C
Ralph = sacrifice 0.25 C
Cars
Sold
Larry 10
Joe
9
Ralph 3
Truck
Sold
5
9
12
 In calculating the oppo.
Cost
 Resource used is kept
constant
 1 month’s sale figure
Q.5 ______ should specialize in truck sales and
______ should specialize in car sales.
Cars
Sold
Larry
Joe
Ralph
10
9
3
Trucks
Sold
5
9
12
A)
B)
C)
D)
E)
Joe; Ralph
Ralph; Larry
Larry; Ralph
Larry; Joe
Joe; Ralph
Ans: b
To ‘sell’ 1 car,
To ‘sell’ 1 truck,
Larry = sacrifice 0.5 T
Joe = sacrifice 1 T
Ralph = sacrifice 4 T
Larry = sacrifice 2 C
Joe = sacrifice 1 C
Ralph = sacrifice 0.25 C
Cars
Sold
Larry 10
Joe
9
Ralph 3
Truck
Sold
5
9
12
Who has comparative advantage?
Comp adv in selling cars
 Ralph
Comp adv in selling truck
 Larry
Difficult to find Com. Adv. For 30
persons?
Q.6 The diagram shows Sven's Production
Possibilities for one day. Sven could move from
the bold PPC to the dashed PPC by
Hours studying
per day
9
8
8
9 Hours at
work per day
A) finding a job that paid a
higher wage.
B) studying fewer hours
but more effectively per
hour.
C) devoting fewer hours to
sleeping
D) spending more time on
leisure activities.
E) spending more time on
the activity for which he
has a comparative
advantage.
Ans: c
What FACTORS can shift the ppf?
Hours studying
per day
9
1. Resource
more resource
 outward shift
8
less resource
 inward shift
2. Technology
improvement
 outward shift
8
9 Hours at
work per day
backward change
 inward shift (rare…)
Note that the PPF output is measured as the number of hours spent, not
as the number of books read or number of jobs done per day.
In Q, what is the ‘resource’ you use in
studying + working?
Hours studying
per day
9
8
8
9 Hours at
work per day
• x-axis/ y-axis: measure
‘hours’
• i.e. TIME
• 3 activities: study, work
and ??
ZZZ+leisure
• 24 hours/ day
• Bold ppc:
sleep + leisure = 16 hours
• Dashed ppc:
sleep + leisure = 15 hours
How will each of them affect ppf?
A)
B)
finding a job that paid a higher wage.
oppo. Cost of studying increase
studying fewer hours but more effectively per hour.
I)
less hour on STUDY
II)
oppo. Cost of work increase
D)
spending more time on leisure activities.
less hours on BOTH
E)
spending more time on the activity for which he has a
comparative advantage.
ANY other person?
CAN/CANNOT calculate comp. adv?
Q.7 According to Moe's PPF, moving from a
grade of 80 in economics to a grade of 90 in
economics
A)
B)
Physics
Grade
Grade
A
90
B
80
C
70
D
60
50
is inefficient
comes at a lower
opportunity cost than
moving from a 90 to a 100
in economics.
C) is not feasible.
D) comes at a higher
opportunity cost than
moving from a 90 to a 100
in economics.
E) is an increase in efficiency.
40
40
50
60
70
80
90
E
100 Economics Grade
Economics Grade
Ans: b
Point C to D
 efficient?
points along ppf
= different combination of Phy + Econ grades by using ALL
available resources
(Cannot increase the output of one good without reducing
the output of another good.)
 equally efficient?
When will efficiency be increased?
Where are inefficient points?
 feasible? Attainable?
Where are unattainable points?
Moving from C to D
 increase econ by 10 grades
 decrease phy by 10 grades (TRADEOFF)
 oppo. Cost = 1 econ grade: 1 phy grade
Physics
Grade
Grade
A
90
B
80
C
70
D
60
50
40
40
50
60
70
80
90
Moving from D to E
 increase econ by 10
grades
 decrease phy by 60
grades
 oppo. Cost
= 1 econ grade: 6 phy
grade
E
100 Economics Grade
Economics Grade
Q.8 As soon as you see the other island's PPC
you realize
coconuts
500
Home
fish
1500
coconuts
500
Foreigner
A) there will be no trade because the
other island has the same
comparative advantage as yours.
B) there will be no trade because
there is no difference in your
ability to harvest coconuts.
C) there will be no trade because the
other island has an absolute
advantage.
D) gains from trade will be possible
because the opportunity cost of
fishing is too high on the other
island.
E) your island will have to specialize
in coconuts if it wants to gain
from trade.
Ans: e
fish
2500
Home:
1 F = forgo 0.33 C
Foreigner:
1 F = forgo 0.2 C
1 C = forgo 3 F
1 C = forgo 5 F
coconuts
500
Home
fish
1500
coconuts
500
Foreigner
fish
2500
• Mutually beneficial
trade possible?
• Yes
(different oppo.
Cost)
• Home: com. Adv in
Coconut prduction
• Foreigner: com.
Adv in fishing
Q.9 When the other island's delegate offers to
give you 1,000 fish in exchange for 500
coconuts, you
A) accept because you will then have a total of 2,500
fish.
B) refuse because your island cannot produce enough
coconuts to trade.
C) refuse because the trade would leave you at a level
of consumption that is less than what you could
produce on your own.
D) accept because the trade will leave you at a level of
consumption that is more than what you could
produce on your own.
E) counter, offering to give them 400 coconuts in
exchange for 1,000 fish.
Ans: c
1,000 fish in exchange for 500 coconuts
• Exchange ratio= 1 fish : 0.5 coconut
• accept?
(if yes, mutually agreed exchange ratio= ‘terms of trade’)
• Oppo. Cost for self-producing
1 fish = 0.33 coconut
• Cheaper to self-produce OR trade?
• If trade, use 500C (use up all resources) to get 1000 fish,
where is this point on ppf?
coconuts
500
Home
1000 fish
fish
1500
Q.10 The fundamental reason the production
possibilities curve has a downward slope is
A)
B)
C)
D)
E)
workers are inefficient.
resources are of low quality.
resources are fixed and therefore tradeoffs
must be made.
it has empirical support but why it is so is
still a mystery.
companies are reluctant to fully exhaust their
resources.
Ans: c
Why ppf is download sloping?
•
•
•
•
Tradeoff
Due to LIMITED resources,
When increase production of good X
Must sacrifice some production of good y
Why some ppf are curve while some are
straight lines?
• Slope of ppf = oppo. Cost of producing 1
more unit of good x
• when does oppo. Cost change ALONG ppf?
A) workers are inefficient.
B) resources are of low quality.
• Same options, can only give rise to a poorer
tech in production but not explaining tradeoff
D) it has empirical support but why it is so is still
a mystery.
• Why does tradeoff exist?
 scarcity
E) companies are reluctant to fully exhaust their
resources.
• i.e. Production points lie INSIDE ppf