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Absolute and Comparative Advantage Exercise

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1. You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom:
Labor Hours Required to Produce One Unit
United Kingdom United States
Wheat 2 1
Cloth 6 5

a) What is the opportunity cost of producing a unit of wheat in the United Kingdom? In the United States?
b) Which country has an absolute advantage in producing wheat? In producing cloth?
c) Which country has a comparative advantage in producing wheat? In producing cloth?
d) Which country should specialize in producing wheat? In producing wheat?

2. (Shape of the PPF) Suppose a production possibilities frontier includes the following combinations:
Cars Washing Machines
0 1,000
100 600
200 0

a) Graph the PPF, assuming that it has no curved segments.
b) What is the cost of producing an additional car when 50 cars are being produced?
c) What is the cost of producing an additional car when 150 cars are being produced?
d) What is the cost of producing an additional washing machine when 50 cars are being produced? When 150 cars are being produced?
e) What do your answers tell you about opportunity costs?

#17 on page 94:
(Demand and Supply) How do you think each of the following affected the world price of oil? (Use demand and supply analysis.)
a) Tax credits were offered for expenditures on home insulation.
b) The Alaskan oil pipeline was completed.
c) The ceiling on the price of oil was removed.
d) Oil was discovered in the North Sea.
e) Sport utility vehicles and minivans became popular.
f) The use of nuclear power declined.
#18 on page 94:
(Demand and supply) What happens to the equilibrium price and quantity of ice cream in response to each of the following? Explain your answers.
a) The price of dairy cow fodder increases.
b) The price of beef decreases.
c) Concerns arise about the fat content of ice cream. Simultaneously, the price of sugar (used to produce ice cream) increases.
#19 on page 94:
(Equilibrium) Consider the following graph in which demand and supply are initially D and S, respectively. What are the equilibrium price and quantity? If demand increases to D', what are the new equilibrium price and quantity? What happens if the government does not allow the price to change when demand increases?

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Solution Summary

First question: solution to a question in which we are given information on the hours of labor required to produce wheat and cloth in the UK and the US. We determine opportunity cost, absolute and comparative advantage, and who should specialize.

Second question: provides the shape of the PPF for a country that can produce Cars and Washing Machines and determines the opportunity costs at different units of production.

Solution also includes a number of multiple choice questions about the demand and suppply of ice cream.