Principles_OTHERsolution_ch3

Principles_OTHERsolution_ch3 - Suggested Answers for...

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1. a. See Figure 2. If Maria spends all five hours studying economics, she can read 100 pages, so that is the vertical intercept of the production possibilities frontier. If she spends all five hours studying sociology, she can read 250 pages, so that is the horizontal intercept. The opportunity costs are constant, so the production possibilities frontier is a straight line. Figure 2 b. It takes Maria two hours to read 100 pages of sociology. In that time, she could read 40 pages of economics. So the opportunity cost of 100 pages of sociology is 40 pages of economics. 3. a. Martha's opportunity cost of knitting a scarf is two dozen meatballs. Martha has an absolute advantage in knitting a scarf because she can make one in two hours, while it takes Stewart three hours. Stewart’s opportunity cost of knitting a scarf is one and one half dozen meatballs. Because Stewart's opportunity cost of knitting a scarf is less than Martha’s, Stewart has a comparative advantage in knitting scarves. b. Because Stewart has a comparative advantage in knitting scarves, he will knit scarves and exchange it for meatballs that Martha makes. c. The highest price of a scarf in terms of meatballs that will make both spouses better off is 2 dozen meatballs. If the price were higher than that, then Martha would prefer knitting her own scarf (at an opportunity cost of two dozen meatballs) rather than trade for a scarf that Stewart makes. The lowest price of a scarf in terms of meatballs that will make both spouses better off is one and one half dozen meatballs. If the price were lower than that, then Stewart would prefer making is own meatballs (he can make one and one-half dozen instead of knitting
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Principles_OTHERsolution_ch3 - Suggested Answers for...

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