101_PS2_ans_03 - Econ 101 Answers for Problem Set 2 Answers...

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Econ 101 Answers for Problem Set 2 Answers to Review Questions 1. An individual has a comparative advantage in the production of a particular good if she can produce it at a lower opportunity cost than other individuals. An individual has an absolute advantage in the production of a good if she can produce more of that good than another individual, using comparable amounts of time, raw materials and effort. 2. A reduction in the number of hours worked each day will shift all points on the production possibilities curve inward, toward the origin. 2 Coffee (lb/day) Nuts (lb/day) PPC 1 PPC 3. Technological innovations that boost labor productivity will shift all points on the production possibilities curve outward, away from the origin. 2 Coffee (lb/day) Nuts (lb/day) PPC 1 PPC 4. Failure to specialize means failure to exploit the wealth-creating possibilities of the principle of comparative advantage. Wealthy people buy most of their goods and services from others not because they can afford to do so, but because the high opportunity cost of their time makes performing their own services too expensive. 5. The fact that English has become the de facto international language has done much to stimulate international demand for American-made books, movies and popular music. The large size of the American market has given the United States an additional advantage over other English-speaking countries, like England, Canada, and Australia. Answers to Problems
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1. In time it takes Ted to wash a car he can wax one-third of a car. So his opportunity cost of washing one car is one-third of a wax job. In the time it takes Tom to wash a car, he can wax one-half of a car. So his opportunity cost of washing one car is one-half of a wax job. Because Ted’s opportunity cost of washing a car is lower than Tom’s, Ted has a comparative advantage in washing cars.
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This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell University (Engineering School).

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101_PS2_ans_03 - Econ 101 Answers for Problem Set 2 Answers...

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