1. Explain why the farmer’s opportunity cost of
producing 1lb of meat is 2lb of potatoes.
• It takes farmer 20 hours to = 1 lb. meat
• It takes farmer 10 hours to = 1lb. Potatoes
• In the same 20 hours- he could have produced
2 lb. of potatoes.
• …so in making 1 lb. meat , he has given up the
opportunity to make 2lb. potatoes
2. Explain why the rancher’s opportunity cost of producing 1lb
of meat is 1/8 lb of potatoes.
• It takes rancher 1 hr to = 1lb meat
• It takes rancher 8 hrs to = 1lb. Potatoes
• In the 1 hr he used to make meat, he could
have produced 1/8 lb potatoes
• …so in making 1lb meat, he has given up the
opportunity to make 1/8 lb potatoes
3. Maria can read 20 pg. of econ in 1hr. or she can read
50 pg. of sociology in 1hr. She spends 5 hrs. per day
studying.
• A. draw Maria’s PPF
100
econ
250 soc.
• B. what is her opportunity cost of reading 100 pages of sociology?
• She can read 100 pg. soc. in 2 hours
• In the same 2 hours she could have read 40 pg.
econ
4. Given the following information about US and Japanese
labor and production:
• 1 American worker can produce 4 cars / year
• 1 Japanese worker can produce 4 cars / year
• 1 American worker can produce 10 tons grain
/ year
• 1 Japanese worker can produce 5 tons grain
/year
• There are 100 million workers in each country
a. construct a table similar to table 3-1 in your text
1 workers production
cars /yr
tons/grain/yr
US
4
10
Japan
4
5
b. graph PPF for US and Japanese economies
*remember – they have 100 million workers
400
US
Cars/millions
Japan
500
Tons grain/ millions
1000
c. For the US, what is the opportunity cost of 1 car (show your
work)
• OC of 1 car = 10 tons
= 2.5 tons grain x 100 mill.
4 cars workers
• d. For the US, what is the opportunity cost of 1 ton of grain
(show your work)
• OC of 1 ton =
4 cars
10 tons
= 0.4 cars x 100 mill workers
e. For Japan, what is the opportunity cost of 1 car
(show your work)
OC 1 car = 5 tons
4 cars
= 1.25 tons x 100 mill. workers
f. For Japan, what is the opportunity cost of 1 ton of
grain (show your work)
OC 1 ton =
4 cars
5 tons
= 0.8 cars x 100 mill. workers
g. Which country has the absolute advantage for cars?
…..grain? Explain w/ #
•
•
•
•
Absolute advantage for cars =
No one – each input produces same output
Absolute advantage for grain=
US – each(same) input produces more output
h. Which country has the comparative advantage for
cars? …..grain? Explain w/ #
• Comp. adv cars =
• Japan – have lower o.c. of producing cars
• Japans oc of 1 car = 1.5 tons vs. US oc of 1 car =
2.5 tons
• Comp adv grain =
• US – have lower oc of producing grain
• US oc of 1 ton grain = .4 cars vs Japans oc of 1
ton grain = .8 cars
i. Without trade: ½ of each countries workers produce cars
and ½ produce grain. Calculate how many cars and tons of
grain are produced by each country.
•
•
•
•
•
•
•
•
US
50 mil x 4 cars = 200 mil cars
50 mil x 10 tons = 500 mil tons
Japan
50 mil x 4 cars = 200 mil cars
50 mil x 5 tons = 250 mil tons
Totals
400 mil cars and 750 mil tons
….so let’s specialize and trade
•
•
•
•
US produces only grain = 1 billion tons
Japan produces only cars = 400 million cars
Total world production has increased
Was 400 m cars and 750 m tons
•
•
•
•
Trade :
US gives up 300 million tons for 200 million cars
Compare to letter ( i )
(had 500 m tons 200 m cars)
US
No trade: 200 m cars 500 m tons
Trade:
200 m cars 700 m tons
Japan
No trade: 200 m cars 250 m tons
Trade:
200 m cars 300 m tons