ECON 1 Lecture Notes - Lecture 2: Opportunity Cost, Comparative Advantage, Absolute Advantage

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26 May 2018

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#2 Thursday 1/18 (Ch.3 Gains from Trade)

Key questions in chapter 3

● Why do nations choose to trade with each other?

● Does international trade help or hurt the US?

● Should we have measures that limit trade with other countries? Should we produce everything we

consume domestically?

Example

● Two countries: US and Japan

● Two goods: computers and wheat

● One resource: labour

● How much each country consumes:

○ If the country is self-sufficient

○ If it trades with other country

Labour and technology in the US

● The US has 50,000 hours of labour available

● Technology:

○ Producing one computer requires 100 hours of labour

○ Producing one ton of wheat requires 10 hours of labour

Technology

● Recall:

○ The technology available in the US determines the slope of the PPF

○ The slope of the PPF defines the opportunity cost

The US without trade (self-sufficiency)

Suppose the US uses half its labour to produce each two goods

Labour and Technology in Japan

● Japan has 30,000 hours of labour

● Technology available in Japan:

○ Producing one computer requires 125 hours of labour

○ Producing one ton of wheat requires 25 hours of labour

● Japan and the US have different technology

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The us has 50,000 hours of labour available. Producing one computer requires 100 hours of labour. Producing one ton of wheat requires 10 hours of labour. The technology available in the us determines the slope of the ppf. The slope of the ppf defines the opportunity cost. Suppose the us uses half its labour to produce each two goods. Producing one computer requires 125 hours of labour. Producing one ton of wheat requires 25 hours of labour. Japan and the us have different technology. Suppose japan uses heaps its labour to produce each good: quality computers and 600 tons of wheat. With trade, a country does not have to produce everything it consumes. Each country can specialise in what it does best, and sell it other country. This make both countries richer : consumes benefit. Trade is not a zero-sum game, but a positive-sum game, both parties can benefit or win . Each country specialises in what it does best:

Related Questions

PART B â Questions 10 â 27 Use the following assumptions to answer all questions: â¢ There are three countries â Argentina, Britain and Canada. â¢ Each country produces and consumes two kinds of goods â crude oil and beef. â¢ All countries make their goods from a single type of input â labor â and each country has 700 hours of labor available to produce crude oil and beef. â¢ Each country demands 5 (five) barrels of crude oil. This assumption simply means that a country must have exactly 5 barrels of crude oil â it may produce them domestically, it may import them from abroad, or it makes some domestically and imports the rest. â¢ Countries produce goods using the technology described in the table below Technology Hours of labor needed to produce one unit of good Using the above assumptions, answer the following questions: â¢ Calculate the quantities of crude oil and beef produced in each country in autarky (when they do not trade and each country produces its own crude oil and beef) â¢ Order the countries according to their absolute advantage in production of crude oil â¢ Order the countries according to their absolute advantage in production of beef â¢ Consider the case where countries are free to specialize and trade. In the table below calculate each countryâs opportunity cost of producing one unit of each good. â¢ Calculate the quantities of crude oil and beef produced in each country, consistent with the countryâs comparative advantage. Based on the above calculations, answer questions 10 through 27: Consider autarky, when countries do not trade and each country produces its own crude oil and beef. 10. In autarky, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 11. In autarky, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 12. In autarky, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 13. In autarky, Argentina produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 14. In autarky, Britain produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 15. In autarky, Canada produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 16. Country of _____ has absolute advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 17. Country of _____ has absolute advantage in production of beef. a. Argentina b. Britain c. Canada d. No country Consider effects of specialization, when countries are allowed to trade. 18. When countries specialize, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 19. When countries specialize, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 20. When countries specialize, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 21. When countries specialize, Argentina produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 22. When countries specialize, Britain produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 23. When countries specialize, Canada produces ____ pounds of beef. a. 0 b. 700 c. 150 d. 400 24. Country of __C___ has comparative advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 25. Country of ___A__ has comparative advantage in production of beef. a. Argentina b. Britain c. Canada d. No country 26. Countries gain from trade because specialization increases ____. a. Trade deficit b. Unemployment c. Efficiency d. Inflation 27. Countries should trade with trading partners that _____. a. Are equally technologically advanced b. Use superior technology in every industry c. Use less advanced technology in every industry d. Use different technologies, because trade benefits all

champagnebee680

The opportunity cost of one more slice of pizza in terms of sodas is the

		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.
		the number of pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.

1 point

QUESTION 2

A production possibilities frontier shows

		how money can be allocated among two kinds of goods.
		the limits to the future growth of a nation.
		the various combinations of output a nation can produce at a certain time, given its available resources and technology.
		that if the price of one good decreases, the price of the other has to increase.

1 point

QUESTION 3

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		remains constant.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		increases.
		decreases.

1 point

QUESTION 4

When all of the available factors of production are being efficiently employed, the

		the economy is producing at a point within its PPF.
		PPF disappears.
		the economy is producing at a point beyond its PPF.
		the economy is producing at a point on its PPF.

1 point

QUESTION 5

If a nation devotes a larger share of its current production to consumer goods, then

		its PPF will shift inward.
		its economic growth will slow down.
		its PPF will shift outward.
		some productive factors will become unemployed.

1 point

QUESTION 6

A point on the production possibilities frontier reflects an

		the attainable point with full employment of all resources.
		attainable point without full employment of all resources.
		unattainable point without full employment of all resources.
		the unattainable point with full employment of all resources.

1 point

QUESTION 7

When drawing a production possibilities frontier, which of the following is held constant?

		the available factors of production and the state of technology
		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced

1 point

QUESTION 8

As we move along the production possibilities frontier,

		more of both goods can be produced.
		the possibilities of tradeoffs diminish.
		a tradeoff is not possible because nations need all goods.
		the production of one good increases as the production of the other good decreases.

1 point

QUESTION 9

Which of the following is an assumption used when drawing a production possibilities frontier?

i.Human wants and desires are limited to what is available.

ii. Only two goods are considered.

iii. The level of technology is fixed and unchanging.

		I and iii
		ii only
		I, ii, and iii
		I only

1 point

QUESTION 10

To achieve gains from trade, a country

		needs to have an absolute advantage in the production of all goods.
		specializes in producing a good in which it has a lower opportunity cost.
		must produce at a point beyond its PPF.
		should produce at the midpoint of its PPF.

1 point

QUESTION 11

Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.

		a comparative advantage
		more production efficiency
		a marginal benefit
		a comparative benefit

1 point

QUESTION 12

Does economic growth depend upon which of the following?

i.Improving the quality of labor

ii. Technological advancement

iii. Increasing the amount of capital

		iii only
		ii only
		I only
		I, ii, and iii

1 point

QUESTION 13

In one hour John can produce 20 loaves of bread or 18 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

		John has a comparative advantage in producing cakes.
		Phyllis has an absolute advantage in both goods.
		Phyllis has a comparative advantage in producing cakes.
		John has an absolute advantage in both goods.

1 point

QUESTION 14

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It decreases.
		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It remains constant.
		It increases.

1 point

QUESTION 15

The production possibilities frontier illustrates the

		goods and services that people want.
		maximum combinations of goods and services that can be produced.
		resources the economy possesses, but not it is the level of technology.
		limits to people's wants.

1 point

QUESTION 16

The United States produced approximately ________ worth of goods and services in 2007.

		$14 billion
		$14 trillion
		$140 billion
		$140 trillion

1 point

QUESTION 17

The fact of increasing opportunity cost when moving on the PPF means that

		to increase the production of one product requires smaller and smaller sacrifices of the other good.
		to decrease the production of one product requires smaller and smaller sacrifices of the other good.
		to increase the production of one product requires larger and larger sacrifices of the other good.
		when the government forces a movement from one point on the PPF to another point, no production is lost.

1 point

QUESTION 18

Other things equal, if India devotes more resources to educate its population than China,

		China will grow faster than India.
		India will be able to eliminate scarcity faster than China.
		India will be able to eliminate opportunity cost faster than China.
		India will grow faster than China.

1 point

QUESTION 19

For Ireland to grow more potatoes, wool production must decrease. This situation is an example of

		zero opportunity cost.
		producing at a point that lies beyond the PPF.
		opportunity benefit.
		a tradeoff.

1 point

QUESTION 20

Moving from one point to another on a production possibilities frontier implies

		increasing the production of both goods.
		increasing the production of one good and decreasing the production of another.
		holding the production levels of both goods constant.
		decreasing the production of both goods.

1 point

QUESTION 21

The United States is one of the richest nations in the world,

		but it can still benefit from specialization and trade.
		so does not need to trade with poor nations to achieve any gains from trade.
		so might not have a comparative advantage in producing any goods.
		so it must have a comparative advantage in the production of all goods.

1 point

QUESTION 22

"Comparative advantage" is defined as a situation in which one person can produce

		more of all goods than another person.
		a good for a lower opportunity cost than another person.
		a good for a lower dollar cost than another person.
		more of a good than another person.

1 point

QUESTION 23

The idea of increasing opportunity cost is reflected in the

		the linear shape of the production possibilities frontier.
		bowed in the shape of the production possibilities frontier.
		bowed out the shape of the production possibilities frontier.
		the positive slope of the production possibilities frontier.

1 point

QUESTION 24

Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country?

i)It enjoys gains from trade.

ii)It must have an absolute advantage in the production of the good it produces.

iii)It is producing at a point beyond its PPF.

		I only.
		I and ii.
		I and iii.
		ii and iii.

1 point

QUESTION 25

If society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will

		shift rightward.
		not shift because the society moves from one point on the frontier to a point inside the frontier.
		not shift because the society moves from a point inside the frontier to a point on the frontier.
		shift leftward.

1 point

ochresea-lion6

1. Which of the following actions reflect self-interested behavior?
(i) Warren Buffett, one of the world's wealthiest individuals, donated more than $30 billion to humanitarian causes such as AIDS and tuberculosis initiatives.
(ii) Pfizer Inc., a private pharmaceutical company, sponsored a disease-management program for Florida's Medicaid patients with chronic illnesses such as asthma, diabetes and heart disease.
(iii) You agree to babysit your 8-year-old brother instead of going to a kick-boxing class.
(iv) You agree to babysit your 8-year-old brother instead of going to a kick-boxing class only if your mother pays you $8 an hour.
A. (iv) only
B. (ii) and (iii) only
C. All of the above actions except (iii)
D. All of the above actions

2. Unlimited wants and limited resources:
A. Can be overcome through innovation
B. Can be overcome by increasing wealth
C. Are not problems faced by wealthy industrialized nations
D. Necessitate choices about the goods to services to consume

3. The production possibilities frontier can be used to demonstrate which of the following?
(i) The best tradeoffs that individuals and societies should make
(ii) The tradeoffs forced on individuals and societies because of scarcity
(iii) The wealth maximizing output combination that an individual or society should choose
A. (i), (ii) and (ii)
B. (i) only
C. (ii) only
D. (iii) only

Figure 1-1 shows the production possibility frontier for the hypothetical country, Lindenderry, which produces only two goods: corn and automobiles. Assume that Lindenderry uses all its productive resources to their maximum capacity.

Figure 1-1

4. If Lindenderry is using its productive resources to their maximum capacity, it must be producing a combination of goods given by a point such as:
A. Point U, V or W
B. Point U, X or W
C. Point V, U or T
D. Point X

5. If Lindenderry is at point U, producing 1300 tons of corn and 34 million automobiles, what is the opportunity cost of an additional 11 million automobiles?
A. 1,100 tons of corn
B. 2,200 tons of corn
C. 200 tons of corn
D. 18.2 tons of corn

6. Suppose Lindenderry is at point S, producing 700 tons of corn and 56 million automobiles. What happens if it sacrifices 11 million automobiles?
A. It moves to point T and gains 400 tons of corn
B. It moves to point T and gains 1,110 tons of corn
C. It moves to point W and gains 700 tons of corn
D. It moves to point W and loses 11 million automobiles

7. Suppose the price of a banana is $0.50, the price of a can of soda is $1.00 and the price of a power bar is $1.50. What is the opportunity cost of a banana?
A. $0.50
B. 1/2 of a power bar
C. 1/3 of a can of soda
D. 1/2 can of soda or 1/3 of a power bar

8. Which of the following statements is false?
A. Mother Teresa faced trade-offs when deciding to help lepers in India rather than some other needy group
B. When the government funds research into cancer, it is able to avoid trade-offs because public funds are used rather than private funds
C. When you volunteer to help at a soup kitchen, you face an opportunity cost of your time
D. Economics brings tradeoffs to light but does not inform us of which trade-offs society should make

9. Which the following would be likely to raise your opportunity cost of going to college full-time?
(i) You have been offered a full-time job as wardrobe assistant to Paris Hilton that pays $60,000 per year.
(ii) You have been offered a merit scholarship that pays for two years of tuition.
(iii) Your landlord increases the rent on the apartment you are currently living in and will continue to live in even if you choose to attend college full-time.
(iv) An increase in the value of your college trust fund set up by your grandfather.
A. All of the above
B. All of the above except (ii)
C. (i) only
D. (i) and (iii) only

Suppose Galesburg produces only two goods: textiles and wheat. Table 1-1 shows the combinations of the two goods that Galesburg can produce if it uses all its productive resources to their maximum capacity.

Table 1-1

10. If Galesburg is currently producing at point H, what is the opportunity cost of obtaining an additional 100 bushels of wheat?
A. 360 bales of textiles
B. 240 bales of textiles
C. 60 bales of textiles
D. 20 bales of textiles

11. Suppose Galesburg is currently producing at point K and would like to move to point J. This movement:
A. Enables it to obtain an additional 20 bales of textiles and an additional 60 bushels of wheat
B. Requires a sacrifice of 60 bushels of wheat to obtain an additional 20 bales of textiles
C. Enables Galesburg to increase textile production with no reduction in wheat production
D. Suggests that point K is an inefficient choice for Galesburg

12. Suppose Galesburg is currently producing 60 bales of textiles and 200 bushels of wheat. Which of the following statements is true?
A. It is not possible to produce more wheat without sacrificing any textiles
B. It is possible to produce more wheat without sacrificing any textiles
C. The people of Galesburg do not value wheat as highly as they value textiles
D. The price of wheat must have fallen, so producers have reduced their supply of wheat

13. Suppose the people of Galesburg want to consume 50 bales of textiles and 310 bushels of wheat. Are they able to achieve this?
A. Yes, if they are willing to pay higher prices for these products to induce suppliers to produce them
B. No, at this time Galesburg has insufficient resources to satisfy its consumers' wants
C. Yes, if they rearrange their resource use so as to increase total output
D. No, Galesburg must increase its money supply in order to do so

14. The opportunity cost of an item is:
A. The price you paid to acquire that item
B. What you could have bought if you did not purchase that item
C. What it costs to make that item
D. Higher than what you paid to obtain that item

15. The opportunity cost of an item is:
A. The value of all the alternatives that must be given up in order to engage in any economic activity
B. The average value of all the alternatives that you forego in order to engage in any economic activity
C. The highest-valued alternative that must be given up in order to engage in any economic activity
D. The lowest-valued alternative that must be given up in order to engage in any economic activity

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ECON 1 Lecture Notes - Lecture 2: Opportunity Cost, Comparative Advantage, Absolute Advantage

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