Problem Set 3(CH3).docx - Problem Set 3(CH3 KWONG Wing Kai 20513986 Problem and Applications(3,4,7,8 Q.3 a The opportunity cost of Pat and Kris in

Problem Set 3(CH3).docx - Problem Set 3(CH3 KWONG Wing Kai...

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Problem Set 3 (CH3) KWONG Wing Kai 20513986 Problem and Applications (3,4,7,8) Q.3 a) The opportunity cost of Pat and Kris in making a pizza is 0.5 gallon of root beer and 2/3 gallon of root beer. Pat has an absolute advantage in making pizza as Pat can make one pizza in 2 hours, rather than Kris who can just make one pizza in 4 hours. Due to the opportunity cost of Pat in making pizza is less than the opportunity cost of Kris, therefore Pat has a comparative advantage in making pizza. b) Pat will trade away pizza in exchange for root beer, it is because Pat has a comparative advantage in making pizza. c) The highest price of pizza in terms of root beer that will make both roommates better off is 2/3 of a gallon of root beer. If the price were higher than that, then Kris would prefer making her own pizza (at an opportunity cost of 2/3 of a gallon of root beer) rather than trading for pizza that Pat makes. The lowest price of pizza in terms of root beer that will make both roommates better off is 1/2 gallon of root beer. If the price were lower than that, then Pat would prefer making her own root beer (she can make 1/2 gallon of root beer instead of making a pizza) rather than trading for root beer that Kris makes. Q.4 a) The opportunity cost of a car is 15 bushels of wheat, as a Canadian worker can make either 2 cars a year of 30 bushels of wheat. So that, the opportunity cost of a bushel of wheat is 1/15 of a car. The relationship between each goods’ opportunity cost is that the reciprocals
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