Practice Questions 2 Answers Fall 2003 Econ 101



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Total amount produced in 120 hours

Wheat

Cotton

Fireland

10

40

Redland

5

30

Use these points to draw PPF for both countries.

b) What is the opportunity cost of 1 bushel of wheat for Fireland? What is the opportunity cost of 1 bushel of wheat for Redland?



Answer: Opportunity cost of a bushel of wheat for Fireland = 40/10 = 4 bushels of cotton.

Opportunity cost of a bushel of wheat for Redland = 30/5 = 6 bushels of cotton

c) What is the opportunity cost of 1 bushel of cotton for Fireland? What is the opportunity cost of 1 bushel of cotton for Redland?



Answer: Simple, inverse of values in b.

Opportunity cost of a bushel of cotton for Fireland = 10/40 =1/ 4 bushels of wheat.

Opportunity cost of a bushel of cotton for Redland = 5/30 = 1/6 bushels of wheat.

d) Who has the absolute advantage in the production of wheat? Who has the absolute advantage in the production of cotton?



Answer: Fireland has the absolute advantage in the production of both wheat and cotton.

e) Who has the comparative advantage in the production of wheat? Who has the comparative advantage in the production of cotton?



Answer: Fireland has the comparative advantage in the production of wheat while Redland has the comparative advantage in the production of cotton.

f) Can Fireland benefit from trade? Explain your answer.



Answer: As long as they have different opportunity cost both will benefit from trade.

5. We have the following data on the production of bread and cookies by Dolly and Molly:

Dolly can make 5 loaves of bread and no cookies in 1hr and 6 loaves of bread and 2 dozen cookies in 2hrs. Molly can make 9 loaves of bread and 3 dozen cookies in 3hrs and 2 loaves of bread and 6 dozen cookies in 2 hrs. Both have 4hrs of time available.

a) On two separate graphs, draw Molly and Dolly’s PPFs placing loaves of bread on x-axis and dozens cookies on the y-axis. (Hint: You will need to convert the data you are given into production combination possible using the entire 4 hrs.)



Answer:




Total amount produced in 4 hours

Dolly

Molly

Bread

20

12

12

4

Cookies

0

4

4

12

Now for both Dolly and Molly we have two points each on the PPF and since PPF is linear we can draw PPF using this data.


b) Who has the absolute advantage in the production of bread? Who has the absolute advantage in the production of cookies?

Answer: Dolly has the absolute advantage in the production of bread while Molly has the absolute advantage in the production of cookies.

c) Who has the comparative advantage in the production of bread? Who has the comparative advantage in the production of cookies?



Answer: Dolly has the comparative advantage in the production of bread. Molly has the comparative advantage in the production of cookies.

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