Practice Questions 2 Answers Fall 2003 Econ 101



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Answer: Country A will produce 6 units of wine and country B will produce 5 units of cloth.

3. Ron and Jon are planning a party. They have one hour to prepare for the party. Ron can make snacks at a rate of 3 snacks per 15 minutes, while Jon makes snacks at 4 per 15 minutes. Ron can make party drinks at a rate of 5 per 15 minutes, while Jon makes drinks at a rate of 8 per 15 minutes.



a) Using two separate graphs, draw the PPF for Ron and Jon placing snacks on the vertical axis and drinks on the horizontal axis.

Answer:




In 1 hour total production of

Snacks

Drinks

Ron

12

20

Jon

16

32

Use the above points to draw PPF for Ron and Jon.

b) What is the opportunity cost of a drink for Ron? What is the opportunity cost of a drink for Jon?



Answer: Opportunity cost of a drink for Ron = 12/20 = 3/5 of a snack.

Opportunity cost of a drink for Jon = 16/32 = 1/2 of a snack.

c) Explain who has the absolute and comparative advantage in the production of drinks and snacks.



Answer: Clearly, from a, Jon has absolute advantage in both snacks and drinks. From b, the opportunity cost of a drink for Jon is less then the opportunity cost of a drink for Ron. So, Jon has the comparative advantage in drink and since the opportunity cost of a snack is opposite of that of a drink, Ron has the comparative advantage in snacks.

d) Can Ron and Jon make 16 drinks and 20 snacks in an hour? If they make 16 drinks and 20 snacks in an hour what combinations of drinks and snacks will each of them produce? Identify the solution on the graph as well as explaining in words.



Answer: there is more than one way this can be done. One is the following: Jon makes 16 drinks and 4 snacks (note this is not efficient) and Ron can make 12 snacks. This is 16 drinks and 20 snacks.

e) Show how your graph will change if Ron takes a bartending class and learns to make drinks twice as fast has he could before taking the class.



Answer: This is easy, now Ron can make 40 drinks in 1 hour and everything else remains the same.

f) What will the new opportunity cost of a drink be for Ron?



Answer: Opportunity cost of a drink for Ron = 12/40 = 3/10 of a snack.

g) Now who has the absolute and comparative advantage in the production of drinks and snacks?



Answer: Clearly, Ron has the absolute and comparative advantage in drink and Jon has the absolute and comparative advantage in snack.

h) If Ron and Jon specialize after Ron’s course, how many drinks and snacks can be made in an hour?



Answer: If each specializes,

Ron will make = 40 drinks

Jon will make = 16 snacks.

i) Show how the solution to part (h) is preferable to a solution where they each spend half of their time on each activity.



Answer: If they spend half their time on each activity,

Ron will make 6 snacks and 20 drinks.

Jon will make 8 snacks and 16 drinks.

So, in total 14 snacks and 36 drinks, less of both goods then in h and hence solution in h is preferable.

4. Fireland and Redland are two small islands producing wheat and cotton. Both of them have 120 labor hours. The following table shows hours needed to produce one bushel of wheat and cotton:







Labor hours needed to produce 1 bushel of

Wheat

Cotton

Fireland

12

3

Redland

24

4

a) Using two separate graphs, draw the PPF for Fireland and Redland placing cotton on the vertical axis and wheat on the horizontal axis.



Answer:






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