Practice Questions: SOLUTIONS Question 1: The following table
Practice Questions: SOLUTIONS Question 1: The following table shows the maximum production combinations of fries and kombucha that can be produced for the economy of WinterIsComing. Linear combinations of fries and kombucha in between points in the table are also possible. Fries (bags) 0 10 20 30 40 50 60
Kombucha (bottles) 120 100 80 60 40 20 0
a) Plot the PPF for WinterIsComing (plot fries on the horizontal axis): 140
120
Kombucha
100
80
60
40
20
0 0
10
20
30
40
50
60
70
Fries
1
b) Can WinterIsComing make 8 bags of fries and 95 bottles of kombucha? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
Yes! 8 bags of fries and 95 bottles of kobucha is inside the feasible region. However, this production combination is NOT efficient. WInterIsComing can do better by producing at point (10 bags of fries, 100 bottles of kombucha), which is on the PPF and makes more of both goods! c) Can WinterIsComing make 35 bags of fries and 60 bottles of kombucha? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
No! This point is beyond the PPF and outside the feasible region.
d) Calculate the opportunity cost of making fries.
PPF is a straight line (linear), so Opportunity cost for both goods is constant. πππ πΆππ π‘ = βπππππ πππΉ ΞKombucha πππ πΆππ π‘ =β ΞFries (Pick any two points to calculate the slope β Iβll use first two points) 100 β 120 β20 πππ πΆππ π‘ =β =β =2 10 β 0 10 Opportunity Cost of making 1 bag of fries is 2 bottles of kombucha. e) Calculate the opportunity cost of making kombucha.
1 πππ πΆππ π‘ 1 πππ πΆππ π‘ = 2 Opportunity Cost of making 1 bottle of kombucha is 0.5 bags of fries. πππ πΆππ π‘
=
2
Question 2: The following table shows the maximum production combinations of burgers and kale that can be produced by the economy of Starboy. Linear combinations of burgers and kale in between points in the table are also possible. Burgers 0 10 20 30 40 50 60 70
Kale (bundles) 1000 930 840 730 600 420 230 0
a) Plot the PPF for Starboy (plot kale on the vertical axis): 1200
1000
Kale
800
600
400
200
0 0
10
20
30
40
50
60
70
80
Burgers
3
b) Can Starboy make 55 burgers and 400 bundles of kale? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
No! This point is beyond the PPF and outside the feasible region.
c) Can Starboy make 5 burgers and 995 bundles of kale? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
No! This point is beyond the PPF and outside the feasible region.
d) Calculate the opportunity cost (per unit basis) of increasing burger output from 40 to 50?
ΞKale ΞBurgers 420 β 600 β180 πππ πΆππ π‘ =β =β = 18 50 β 40 10 Opportunity Cost (on a per unit basis) of increasing burger production from 40 to 50 is 18 bundles of kale. πππ πΆππ π‘
=β
e) Calculate the opportunity cost of (per unit basis) of increasing kale output from 840 bundles to 930 bundles.
ΞBurgers ΞKale 10 β 20 β10 1 πππ πΆππ π‘ =β =β = 930 β 840 90 9 Opportunity Cost (on a per unit basis) of increasing kale production from 840 to 930 is 1/9 burgers. πππ πΆππ π‘
=β
4
Question 3: Suppose there are only two goods in the world: shoes and laptops. If the economy of Warriors can make more of both goods than any other economy, then there is no benefit for Warriors from trading with others since no other economy can produce as many shoes or laptops. Do you agree? Please explain.
Disagree. Even though the Warriors have an absolute advantage in making shoes and laptops, it can still benefit from trade. Another economy will have a comparative advantage in producing one of the goods. Specializing in the good in which there is a comparative advantage will result in more total good goods produced and there will be trades available that will make both Warriors and its trade partner better off.
Question 4: When considering which product to specialize in, a country should specialize in the product that it has an absolute advantage in producing. Do you agree? Please explain.
Disagree. The concept of comparative advantage is paramount in making both parties better off in trade. Absolute advantage is irrelevant and usually leads to the wrong answer about trade (see previous question).
5
Question 5: What does the PPF show and represent? Why is the PPF bounded (ie. why is there a frontier / border)? What can shift the PPF to the right?
The PPF represents all combination of products (in a 2 product economy) an economy can produce if it uses inputs efficiently. That is, it canβt increase production of one product without decreasing the production of the other. Itβs bounded because of the existing technology and factors of production in the economy. Likewise, improvements in technology and / or increases in factors of production shift the PPF to the right, which increases the set of possible efficient production combinations.
Question 6: Explain why a production combination inside the PPF is inefficient.
Inefficient because the economy can produce more of one (or both) good(s) without decreasing production of the other.
6
Question 7: The following table shows the maximum production combinations (in bottles) of IPA and milk that can be produced by County A and County B. The bold production combinations are what each country is producing at the moment. Country A IPA 0 50 100 150 200 250 300
Country B Milk 600 500 400 300 200 100 0
IPA 0 15 30 45 60 75 90
Milk 420 350 280 210 140 70 0
a) Graph the PPF for both countries in the spaces below. Country A 700
600
500
Milk
400
300
200
100
0 0
50
100
150
200
250
300
350
IPA
7
Country B 450 400 350 300
Milk
250 200 150 100 50 0 0
10
20
30
40
50
60
70
80
90
100
IPA
b) Calculate the opportunity costs of producing one additional bottle of milk for each country.
PPF is a straight line (linear), so Opportunity cost for both goods is constant. Country A: ΞIPA πππ πΆππ π‘ =β ΞMilk (Pick any two points to calculate the slope β Iβll use first and last points) 0 β 300 β300 1 πππ πΆππ π‘ =β =β = 600 β 0 600 2 Opportunity Cost of making 1 bottle of milk is 0.5 bottles of IPA. Country B: ΞIPA ΞMilk (Pick any two points to calculate the slope β Iβll use first and last points) 0 β 90 β90 3 πππ πΆππ π‘ =β =β = 420 β 0 420 14 Opportunity Cost of making 1 bottle of milk is 3/14 bottles of IPA. πππ πΆππ π‘
=β
8
c) Calculate the opportunity costs of producing one additional bottle of IPA for each country. Country A: 1 πππ πΆππ π‘ =β πππ πΆππ π‘ 1 πππ πΆππ π‘ = =2 1 2 Opportunity Cost of making 1 bottle of IPA is 2 bottles of milk.
Country B: 1 πππ πΆππ π‘ 1 14 πππ πΆππ π‘ = = 3 3 14 Opportunity Cost of making 1 bottle of IPA is 4 2/3 bottles of milk. πππ πΆππ π‘
=β
d) Which country has the absolute advantage in producing each good?
Country A has the absolute advantage in making both IPA and milk.
e) Which country has the comparative advantage in producing each good?
Country A has comparative advantage in making IPA while Country B has the comparative advantage in making milk.
9
f) What should Country A and B each specialize in producing?
Country A should specialize in IPA while Country B should specialize in milk.
g) Given each country specializes in producing the good in part f, propose a trade that will make everybody better off than what each is currently producing without trade.
Before specialization: Country A: 150 IPA bottles and 300 milk bottles Country B: 75 IPA bottles and 70 milk bottles After specialization: Country A: 300 IPA bottles Country B: 420 milk bottles One Possible Trade (there are many): Country A trades 80 IPA bottles and Country B trades 310 milk bottles After Trade: Country A: 220 IPA bottles and 310 milk bottles Country B: 80 IPA bottles and 110 milk bottles ο¨ Both countries better off after specialization and trade!
10
Question 8: There are two rival groups in a place far, far away: the Jedi and the Sith. Only two goods are produced: hooded robes and lightsabers. The Jedi can produce 40 hooded robes and no lightsabers; or 55 lightsabers and no hooded robes; or any combination in between. On the other side, the Sith can produce 50 hooded robes and no lightsabers; or 40 lightsabers and no robes; or any combination in between. a) Graph the PPF for both groups in the spaces below. Assume both PPFs are linear. Jedi
Sith
90 80 70
Lightsabers
60 50 40 30 20 10 0 0
10
20
30
40
50
60
Hooded Robes
b) Which group has a comparative advantage in making hooded robes and which has a comparative advantage in making lightsabers?
PPF is a straight line (linear), so Opportunity cost for both goods is constant. Jedi: ΞLighsabers πππ πΆππ π‘ =β ΞRobes 0 β 55 55 πππ πΆππ π‘ =β = = 1.375 40 β 0 40 Opportunity Cost of making 1 hooded robe is 1.375 lightsabers. 11
Sith: ΞLighsabers ΞRobes 0 β 40 40 πππ πΆππ π‘ =β = = 0.80 50 β 0 50 Opportunity Cost of making 1 hooded robe is 0.80 lightsabers. πππ πΆππ π‘
=β
ο¨ Sith has the comparative advantage in making lightsabers and Jedi has comparative advantage in making hooded robes.
c) Thereβs been a forceful technological breakthrough for the Sith that now allows them to double their lightsabers production. Draw the Sithβs new PPF. Jedi
Sith
90 80 70
Lightsabers
60 50 40 30 20 10 0 0
10
20
30
40
50
60
Hooded Robes
12
c) After the forceful technological breakthrough for the Sith, which group has a comparative advantage in making hooded robes and which has a comparative advantage in making lightsabers?
Jedi: Nothingβs changed here. Sith: ΞLighsabers ΞRobes 0 β 80 80 πππ πΆππ π‘ =β = = 1.60 50 β 0 50 Opportunity Cost of making 1 hooded robe is 1.60 lightsabers. πππ πΆππ π‘
=β
ο¨ Now Jedi has the comparative advantage in making lightsabers and Sith has comparative advantage in making hooded robes.
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Kombucha (bottles) 120 100 80 60 40 20 0
a) Plot the PPF for WinterIsComing (plot fries on the horizontal axis): 140
120
Kombucha
100
80
60
40
20
0 0
10
20
30
40
50
60
70
Fries
1
b) Can WinterIsComing make 8 bags of fries and 95 bottles of kombucha? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
Yes! 8 bags of fries and 95 bottles of kobucha is inside the feasible region. However, this production combination is NOT efficient. WInterIsComing can do better by producing at point (10 bags of fries, 100 bottles of kombucha), which is on the PPF and makes more of both goods! c) Can WinterIsComing make 35 bags of fries and 60 bottles of kombucha? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
No! This point is beyond the PPF and outside the feasible region.
d) Calculate the opportunity cost of making fries.
PPF is a straight line (linear), so Opportunity cost for both goods is constant. πππ πΆππ π‘ = βπππππ πππΉ ΞKombucha πππ πΆππ π‘ =β ΞFries (Pick any two points to calculate the slope β Iβll use first two points) 100 β 120 β20 πππ πΆππ π‘ =β =β =2 10 β 0 10 Opportunity Cost of making 1 bag of fries is 2 bottles of kombucha. e) Calculate the opportunity cost of making kombucha.
1 πππ πΆππ π‘ 1 πππ πΆππ π‘ = 2 Opportunity Cost of making 1 bottle of kombucha is 0.5 bags of fries. πππ πΆππ π‘
=
2
Question 2: The following table shows the maximum production combinations of burgers and kale that can be produced by the economy of Starboy. Linear combinations of burgers and kale in between points in the table are also possible. Burgers 0 10 20 30 40 50 60 70
Kale (bundles) 1000 930 840 730 600 420 230 0
a) Plot the PPF for Starboy (plot kale on the vertical axis): 1200
1000
Kale
800
600
400
200
0 0
10
20
30
40
50
60
70
80
Burgers
3
b) Can Starboy make 55 burgers and 400 bundles of kale? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
No! This point is beyond the PPF and outside the feasible region.
c) Can Starboy make 5 burgers and 995 bundles of kale? Where would this combination lie on the graph? Comment on this production combination relative to the PPF.
No! This point is beyond the PPF and outside the feasible region.
d) Calculate the opportunity cost (per unit basis) of increasing burger output from 40 to 50?
ΞKale ΞBurgers 420 β 600 β180 πππ πΆππ π‘ =β =β = 18 50 β 40 10 Opportunity Cost (on a per unit basis) of increasing burger production from 40 to 50 is 18 bundles of kale. πππ πΆππ π‘
=β
e) Calculate the opportunity cost of (per unit basis) of increasing kale output from 840 bundles to 930 bundles.
ΞBurgers ΞKale 10 β 20 β10 1 πππ πΆππ π‘ =β =β = 930 β 840 90 9 Opportunity Cost (on a per unit basis) of increasing kale production from 840 to 930 is 1/9 burgers. πππ πΆππ π‘
=β
4
Question 3: Suppose there are only two goods in the world: shoes and laptops. If the economy of Warriors can make more of both goods than any other economy, then there is no benefit for Warriors from trading with others since no other economy can produce as many shoes or laptops. Do you agree? Please explain.
Disagree. Even though the Warriors have an absolute advantage in making shoes and laptops, it can still benefit from trade. Another economy will have a comparative advantage in producing one of the goods. Specializing in the good in which there is a comparative advantage will result in more total good goods produced and there will be trades available that will make both Warriors and its trade partner better off.
Question 4: When considering which product to specialize in, a country should specialize in the product that it has an absolute advantage in producing. Do you agree? Please explain.
Disagree. The concept of comparative advantage is paramount in making both parties better off in trade. Absolute advantage is irrelevant and usually leads to the wrong answer about trade (see previous question).
5
Question 5: What does the PPF show and represent? Why is the PPF bounded (ie. why is there a frontier / border)? What can shift the PPF to the right?
The PPF represents all combination of products (in a 2 product economy) an economy can produce if it uses inputs efficiently. That is, it canβt increase production of one product without decreasing the production of the other. Itβs bounded because of the existing technology and factors of production in the economy. Likewise, improvements in technology and / or increases in factors of production shift the PPF to the right, which increases the set of possible efficient production combinations.
Question 6: Explain why a production combination inside the PPF is inefficient.
Inefficient because the economy can produce more of one (or both) good(s) without decreasing production of the other.
6
Question 7: The following table shows the maximum production combinations (in bottles) of IPA and milk that can be produced by County A and County B. The bold production combinations are what each country is producing at the moment. Country A IPA 0 50 100 150 200 250 300
Country B Milk 600 500 400 300 200 100 0
IPA 0 15 30 45 60 75 90
Milk 420 350 280 210 140 70 0
a) Graph the PPF for both countries in the spaces below. Country A 700
600
500
Milk
400
300
200
100
0 0
50
100
150
200
250
300
350
IPA
7
Country B 450 400 350 300
Milk
250 200 150 100 50 0 0
10
20
30
40
50
60
70
80
90
100
IPA
b) Calculate the opportunity costs of producing one additional bottle of milk for each country.
PPF is a straight line (linear), so Opportunity cost for both goods is constant. Country A: ΞIPA πππ πΆππ π‘ =β ΞMilk (Pick any two points to calculate the slope β Iβll use first and last points) 0 β 300 β300 1 πππ πΆππ π‘ =β =β = 600 β 0 600 2 Opportunity Cost of making 1 bottle of milk is 0.5 bottles of IPA. Country B: ΞIPA ΞMilk (Pick any two points to calculate the slope β Iβll use first and last points) 0 β 90 β90 3 πππ πΆππ π‘ =β =β = 420 β 0 420 14 Opportunity Cost of making 1 bottle of milk is 3/14 bottles of IPA. πππ πΆππ π‘
=β
8
c) Calculate the opportunity costs of producing one additional bottle of IPA for each country. Country A: 1 πππ πΆππ π‘ =β πππ πΆππ π‘ 1 πππ πΆππ π‘ = =2 1 2 Opportunity Cost of making 1 bottle of IPA is 2 bottles of milk.
Country B: 1 πππ πΆππ π‘ 1 14 πππ πΆππ π‘ = = 3 3 14 Opportunity Cost of making 1 bottle of IPA is 4 2/3 bottles of milk. πππ πΆππ π‘
=β
d) Which country has the absolute advantage in producing each good?
Country A has the absolute advantage in making both IPA and milk.
e) Which country has the comparative advantage in producing each good?
Country A has comparative advantage in making IPA while Country B has the comparative advantage in making milk.
9
f) What should Country A and B each specialize in producing?
Country A should specialize in IPA while Country B should specialize in milk.
g) Given each country specializes in producing the good in part f, propose a trade that will make everybody better off than what each is currently producing without trade.
Before specialization: Country A: 150 IPA bottles and 300 milk bottles Country B: 75 IPA bottles and 70 milk bottles After specialization: Country A: 300 IPA bottles Country B: 420 milk bottles One Possible Trade (there are many): Country A trades 80 IPA bottles and Country B trades 310 milk bottles After Trade: Country A: 220 IPA bottles and 310 milk bottles Country B: 80 IPA bottles and 110 milk bottles ο¨ Both countries better off after specialization and trade!
10
Question 8: There are two rival groups in a place far, far away: the Jedi and the Sith. Only two goods are produced: hooded robes and lightsabers. The Jedi can produce 40 hooded robes and no lightsabers; or 55 lightsabers and no hooded robes; or any combination in between. On the other side, the Sith can produce 50 hooded robes and no lightsabers; or 40 lightsabers and no robes; or any combination in between. a) Graph the PPF for both groups in the spaces below. Assume both PPFs are linear. Jedi
Sith
90 80 70
Lightsabers
60 50 40 30 20 10 0 0
10
20
30
40
50
60
Hooded Robes
b) Which group has a comparative advantage in making hooded robes and which has a comparative advantage in making lightsabers?
PPF is a straight line (linear), so Opportunity cost for both goods is constant. Jedi: ΞLighsabers πππ πΆππ π‘ =β ΞRobes 0 β 55 55 πππ πΆππ π‘ =β = = 1.375 40 β 0 40 Opportunity Cost of making 1 hooded robe is 1.375 lightsabers. 11
Sith: ΞLighsabers ΞRobes 0 β 40 40 πππ πΆππ π‘ =β = = 0.80 50 β 0 50 Opportunity Cost of making 1 hooded robe is 0.80 lightsabers. πππ πΆππ π‘
=β
ο¨ Sith has the comparative advantage in making lightsabers and Jedi has comparative advantage in making hooded robes.
c) Thereβs been a forceful technological breakthrough for the Sith that now allows them to double their lightsabers production. Draw the Sithβs new PPF. Jedi
Sith
90 80 70
Lightsabers
60 50 40 30 20 10 0 0
10
20
30
40
50
60
Hooded Robes
12
c) After the forceful technological breakthrough for the Sith, which group has a comparative advantage in making hooded robes and which has a comparative advantage in making lightsabers?
Jedi: Nothingβs changed here. Sith: ΞLighsabers ΞRobes 0 β 80 80 πππ πΆππ π‘ =β = = 1.60 50 β 0 50 Opportunity Cost of making 1 hooded robe is 1.60 lightsabers. πππ πΆππ π‘
=β
ο¨ Now Jedi has the comparative advantage in making lightsabers and Sith has comparative advantage in making hooded robes.
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