answer-key-ps2.doc - Fall Term 2014 Marmara University Introduction to Economics(Econ 203 Department of Industrial Engineering Answer key-Problem Sheet

answer-key-ps2.doc - Fall Term 2014 Marmara University...

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Fall Term 2014 Marmara University Introduction to Economics (Econ 203) Department of Industrial Engineering Answer key-Problem Sheet 2 Interdependence and the gains from Trade 1. Consider a professor who is writing a book. The professor can both write the chapters and gather the needed data faster than anyone else at his university. Still, he pays a student to collect data at the library. Is this sensible? Explain. Answer: Though the professor could do both writing and data collection faster than the student (that is, he has an absolute advantage in both), his time is limited. If the professor's comparative advantage is in writing, it makes sense for him to pay a student to collect the data, since that is the student's comparative advantage. 2. Americans and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. Assume that each country has 100 million workers. a. Graph the production possibilities frontier of the American and Japanese economies. b. For the U.S., what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? c. Which country has an absolute advantage in producing cars? In producing grain? d. Which country has a comparative advantage in producing cars? In producing grain? e. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce? f. Starting from a position without trade, give an example in which trade makes each country better off.
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