Exam 3: Interdependence and the Gains From Trade

Michael can score 30 points per game and Scottie can score 22 points per basketball game. Michael has both an absolute and a comparative advantage over Scottie in scoring.

In one day, John can make 100 of good X or 50 of good Y. In the same period Lucy can make 40 of good X and 80 of good Y. a. If both people used half their time to make good X, what is the total amount of X that would be made? b. Suppose the person with the comparative advantage in X reduced production by one unit of Y to make more X. Suppose that the person with the comparative advantage in Y reduced production of by one unit of X. How does the total production of X change compared to (a)?

Absolute advantage is found by:

David Ricardo:

Table 3-2 -According to Table 3-2:

Adam Smith:

Suppose it takes Jean four hours to catch 10 fish and one hour to collect one kilogram of mushrooms. It takes Lee four hours to catch 10 fish and 30 minutes to collect one kilogram of mushrooms. It is not possible for Jean and Lee to gain from specialisation and trade.

Joan can catch 20 lobsters in one day. It also takes her one day to make five lobster-pots to catch the lobsters. Her opportunity cost of one lobster-pot is 20 lobsters.

Comparative advantage will always occur when two parties have different opportunity costs in production.

The reason most people provide you with goods and services is because:

Jean grows rice at a higher cost than Lee. Suppose Lee catches fish at a higher cost than Jean. For this reason it only benefits Lee they trade.

A country's consumption possibilities frontier can be moved outside its production possibilities frontier:

Ned is an intellectual property lawyer. He is not the best litigator in the firm, but he is the fastest typist in the world. Do you think that Ned should do his own typing?

When parties specialise in the production of goods they have a comparative advantage in, total production is increased and both parties can gain from trade.

Table 3-3 -Refer to Table 3-3. If Europe and the US trade according to the principle of comparative advantage:

A butcher can produce only hamburgers, and a farmer can produce only potato chips. The butcher and the farmer both like both foods. They:

Use the accompanying table to answer the following questions. Table 3-4 -According to Table 3-4:

Sam and Mattie produce hogs and corn. Sam can produce 100 hogs or 2000 bushels of corn per year. Mattie can produce 80 hogs or 1200 bushels of corn per year. Suppose that both devote their time equally between the production of hogs and corn. a. Who has the absolute advantage in production? b. How many hogs are being produced in total before any trade? c. How many less hogs would be produced if Sam grew 60 more bushels of corn instead? d. How many more hogs would be produced if Mattie grew 60 less bushels of corn instead?

Use the accompanying table to answer the following questions. Table 3-4 -According to Table 3-4, England and Spain could benefit by specialising in _____ respectively.

Jack and Catherine have a cooperative project that must be completed for a business class. The project involves doing a series of calculations and writing a report. It would take Jack 10 hours to do the required calculation and 10 hours to write the report. It would take Catherine 12 hours to do the calculations and 20 hours to write the report. a. How much time would it take the two to complete the project if they divide the calculations equally and the writing equally? b. How much time would it take the two to complete the project if they use comparative advantage and specialise in calculating or writing? c. If Catherine and Jack have the same opportunity cost of $5 per hour, is there a better solution than for each to specialise in calculating or writing?