EC120 Chapter Notes - Chapter 3: Opportunity Cost, Absolute Advantage, Comparative Advantage

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bluebeetle137

12 Mar 2016

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Catle-farming pro is bad at growing potatoes and potato growing pro is bad at raising catle should trade with each other so they can both specialize in what they are good at and trade with each other. Absolute advantage- the comparison among producers of a good according to their producivity. Producer that requires a smaller quanity of inputs to produce a good. Opportunity cost- whatever must be given up to obtain some item. Comparaive advantage- the comparison among producers of a good according to their opportunity cost. It is possible for one person to have absolute advantage in both goods, it is impossible for one person to have comparaive advantage in both goods. Since opportunity cost of one good is the inverse of the opportunity cost of the other, if oc of one good is relaively high, his opportunity cost of the other good must be relaively low. Gains from specializaion and trade are based on comparaive advantage.

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(1) Implicit costs are the opportunity costs of using the resources of ---------------------------------------------

a. outsiders.

b. banks.

c. retained earnings.

d. owners.

(2) The Principle of Comparative Advantage implies that:

a. Two countries can benefit from trade only if one country is better at producing a good compared to another in absolute terms.

b. Two countries can benefit from specialization and trade even if one country is better at one good compared to another in absolute terms.

c. all countries should specialize in whatever they have a higher opportunity cost to producing.

d. all countries are better off when each produces all goods for themselves and they do not trade with each other.

(3) Points inside a production possibilities frontier represent

a. unemployment of resources

b. unattainable production combinations

c. efficient use of resources

d. supply exceeds demand

(4) In a free market --------------------------------

a. governments intervene

b. governments plan production

c. governments interfere

d. prices adjust to reconcile scarcity and desires

crimsonmarten898

Suppose that two people, Michelle and James each live alone in anisolated region. They each have the same resources available, andthey grow potatoes and raise chickens. If Michelle devotes all herresources to growing potatoes, she can raise 200 pounds of potatoesper year. If she devotes all her resources to raising chickens, shecan raise 50 chickens per year. (If she apportions some resourcesto each, then she can produce any linear combination of chickensand potatoes that lies between those extreme points. If Jamesdevotes all his resources to growing potatoes, he can raise 80pounds of potatoes per year. If he devotes all his resources toraising chickens, he can raise 40 chickens per year. (If heapportions some resources to each, then he can produce any linearcombination of chickens and potatoes that lies between thoseextreme points.)
what is michelles opportunity cost of producing potatoes
what is michelles opportunity cost of producing chickens
what is james opportunity cost of producing potatoes
what is james opportunity cost of producing chickens
which person has an absolute advantage in which activities.
which person has comparative advantage in potatoes
which person has comparative advantage in chicken
Suppose that they're thinking of each specializing completely inthe area in which they have a comparative advantage, and thentrading at a rate of 2.5 pounds of potatoes for one chicken, wouldthey each be better off? Explain?
How would you extend the above narrative to businesses, society asa whole or nations? Explain

erintermite616

Suppose two people, Michelle and James each live alone in anisolated region. Both have the same resources available, and thegrow potatoes, and raise chickens. If Michelle devotes all herresources to growing potatoes, she can raise 200 pounds of potatoesa year. If she devotes all her resources to raising chickens, shecan raise 50 chickens per year. (If she apportions some resourcesto each, then she can produce any linear combination of chickensand potatoes that lies between those extreme points. If Jamesdevotes all his resources to growing potatoes, he can raise 80pounds of potatoes per year. If he devotes all his resourcesraising chickens, he can raise 40 chickens a year. ( If heapportions some resources to each, the he can produce any linearcombination of chickens and potatoes that lies between thoseextreme points).

1. What is Michelle's opportunity cost of producing potatoes?

2. What is Michelle's opportunity cost of producing chickens?

3. What is James' opportunity cost of producing potatoes?

4. What is James' opportunity cost of producing chickens?

5. Which person has an absolute advantage in whichactivities?

6.Which person has comparative advantage in potatoes?

7. Which person has comparative advantage in chickens?

8. Suppose that they are thinking of each specializing completelyin the area in which they have a comparative advantage, and then ata rate of 2.5 pounds of potatoes for 1 chicken,would they each bebetter off?

Explain

9. How would you extend the above narrative to businesses, societyas a whole or nations? Explain

lavenderllama915

EC120 Chapter Notes - Chapter 3: Opportunity Cost, Absolute Advantage, Comparative Advantage

EC120 Full Course Notes

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