Download ECON 1001 AB Introduction to Economics I Dr. Ka

Chapter 2
Comparative Advantage
Q. 1, 3, 5, 7
Q. 9 Please see under “Answers” from the tutorial weekly schedule
Problem #1, Chapter 2
• Ted can wax 4 cars per day or wash 12 cars.
Tom can wax 3 cars per day or wash 6. What is
each man’s opportunity cost of washing a car?
Who has comparative advantage in washing
cars?
Solution to problem #1 (1)
• Both Ted and Tom have two options to choose
from: waxing cars or washing cars
• If one chooses to wax (wash) cars, one will
have to forgo washing (waxing) cars
• Opportunity Cost
– The value of your next best alternative that you
must forgo in order to engage in your current
activities
Solution to problem #1 (2)
Ted
• If Ted chooses to wash a car,
he will have to forgo having
1/3 car waxed
• The 1/3 car wax forgone is
actually his opportunity cost of
having a car wash
• Opportunity cost = relative
efficiency of two activities
– Units of forgone activity you
can do in a given amount of
time/ Units of current activity
you can do in a same given
amount of time
Waxing
Washing
Ted
4 cars/hr
12
cars/hr
Tom
3 cars/hr 6 cars/hr
Solution to problem #1 (3)
• Applying the above formula, we can also compute Ted’s
opportunity cost of waxing a car
– 12 units of car wash forgone in an hour / 4 units of car wax can
be performed in an hour
– Ted’s opportunity cost of waxing a car is 3 units of car wash
Tom
• Similarly, Tom’s opportunity cost of washing a car is
– 3 units of car wax forgone in an hour/ 6 units of car wash can be
performed in an hour
– Tom’s opportunity cost of washing a car is 0.5 unit of car wax
Solution to problem #1 (4)
• We can also compute Tom’s opportunity cost
of waxing a car using the formula discussed
– 6 units of car wash forgone in an hour / 3 units of
car wax can be done in an hour
– Tom’s opportunity cost of waxing a car is 2 units of
car wash
• Who has a comparative advantage in washing
cars?
Solution to problem #1 (5)
• Comparative advantage
– Notion of comparative advantage refers to one’s relative efficiency
in doing an activity over that of the other person
– In other words, if one has a comparative advantage in an activity
over another person’s, one will have a lower opportunity cost of
doing the activity than the other person
– Since Ted has a lower opportunity cost of washing cars (1/3 units
of car wax forgone) than Tom whose opportunity cost of washing
cars is 1/2 units of car wax forgone), TED HAS A COMPARATIVE
ADVANTAGE IN WASHING A CAR
• Same logic can be applied to comparative advantage in
waxing cars
Problem #3, Chapter 2
• Toby can produce 5 gallons of apple cider or 2.5
ounces of feta cheese per hour. Kyle can
produce 3 gallons of apple cider or 1.5 ounces
of feta cheese per hour. Can Toby and Kyle
benefit from specialization and trade? Explain.
Solution to problem #3 (1)
• In order to answer this
question, we will need to
compute the opportunity
costs of producing apple
cider and feta cheese per
hour
• Both Toby and Kyle have
two options to choose
from: producing apple
cider or feta cheese
Apple
cider
Feta
cheese
Toby
2.5
5gallons/
ounces/
hr
hr
Kyle
1.5
3gallons/
ounces/
hr
hr
Solution to problem #3 (2)
Toby
• Opportunity cost of producing apple cider
– 2.5 units of feta cheese forgone in an hour / 5
units of apple cider produced in an hour
– Toby’s opportunity cost of producing apple cider is
1/2 units of feta cheese
• Opportunity cost of producing feta cheese
– 5 units of apple cider forgone in an hour / 2.5
units of feta cheese produced in an hour
– Toby’s opportunity cost of producing feta cheese
is 2 units of apple cider
Solution to problem #3 (3)
Kyle
• Opportunity cost of producing apple cider
– 1.5 units of feta cheese forgone in an hour / 3
units of apple cider produced in an hour
– Kyle’s opportunity cost of producing apple cider is
1/2 units of feta cheese
• Opportunity cost of producing feta cheese
– 3 units of apple cider forgone in an hour / 1.5
units of feta cheese produced in an hour
– Kyle’s opportunity cost of producing feta cheese is
2 units of apple cider
Solution to problem #3 (4)
• Both of them have the opportunity costs of producing
apple cider and feta cheese (1/2 units of feta cheese and 2
units of apple cider respectively)
• They do not have a comparative advantage in producing
apple cider or feta cheese over each other
• Since benefits from trade rely on different opportunity
costs among trading parties, there will be no gain from
trade / specification
• In other words, no comparative advantage = no gain from
trade. Comparative advantage is from source of difference
in technology, education attainment and skills
Problem #5, Chapter 2
• Consider a society consisting of only Helen,
who allocates her time between sewing
dresses and baking bread. Each hour she
devotes to sewing dresses yields 4 dresses,
and each hour devotes to baking bread yields
8 loaves of bread. If Helen works a total of 8
hours per day, graph her production
possibilities curve.
Solution to problem #5 (1)
• Under scarcity, each faces a time constraint
• Helen has a total of 8 hours to either sewing
dresses or baking bread
• If Helen devotes all her available time to
sewing dresses, she can sew 32 dresses a day
(4 dresses per hour x 8 hours)
• If Helen devotes all her available time to
baking bread, she can bake 64 loaves of bread
a day (8 loaves of bread per hour x 8 hours)
Solution to problem #5 (2)
• Production possibilities curve
– a curve showing different quantities of two goods
(sewing dresses and baking bread) that an economy
(Helen) can efficiently produce with a given amount
of resources (a time constraint of 8 hours per day)
Dressed sewed
per day
Slope of the curve =
opportunity cost
32
1
2
0
64
Loaves of bread
baked per day
Solution to problem #5 (3)
• It does not matter what is on x-axis or y-axis as
long as the graph is well-labeled
Loaves of
bread baked 64
per day
0
32
Dresses sewed
per day
Problem #7, Chapter 2
• Suppose that in problem # 5 a sewing machine
is introduced that enables Helen to sew 8
dresses per hour rather than only 4. Show
how this development shifts her production
possibilities curve.
Solution to problem #7 (1)
• Suppose Helen now has a sewing machine to
work with, her productivity in sewing dresses
is increased from 4 dresses per day to 8
dresses per day. A 100% increase in the
productivity
• Given that she only has 8 hours to work a day,
if she devotes all her time to sewing dresses,
she can now work with the sewing machine
and sew 64 dresses a day (8 dresses per hour x
8 hours)
Solution to problem #7 (2)
Dresses sewed
per day
64
The
productivity
has increased
from 32
dresses to 64
dresses a day
A sewing machine is
introduced
32
0
64
Loaves of
bread baked
per day