Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Econ 301 – F07 ANSWERS to PROBLEM SET 1 - due in class on Tuesday September 11 Wissink 1. Argentina and Brazil both produce leather and coffee with labor. The labor input is measured in hours, coffee is measured in gallons and leather is measured in yards. The table below shows labor requirements to produce a unit of coffee and of leather in each country. (It is assumed that the labor requirements per unit of output in production remain the same irrespective of the quantity of the two goods produced.) Each country has 120 hours of labor available, which can be allocated between the two activities. Labor can not go from one country to the other but coffee and leather can. HOURS REQUIRED Argentina Brazil 1 gallon of coffee 10 hrs 4 hrs 1 yard of leather 15 hrs 20 hrs a. Graph the production possibilities frontier (PPF) for both Argentina and Brazil (separately) clearly labeling the axes. (Note: The labor requirements per unit of output remain constant irrespective of the quantity produced.) [ANSWER] L Argentina = L Brazil = 120 hours b. What is the opportunity cost of producing an extra gallon of coffee in Argentina? In Brazil? [ANSWER] The opportunity cost of producing an extra gallon of coffee = the marginal opportunity cost of producing coffee in terms of leather (MOC) Argentina: MOC of Coffee is 2/3 (yards of leather/1 gallon of coffee) Brazil: MOC of Coffee is 1/5 (yards of leather/1 gallon of coffee) c. What is the opportunity cost of producing an extra yard of leather in Argentina? In Brazil? [ANSWER] Argentina: MOC of Leather is 3/2 (gallons of coffee/1 yard of leather) Brazil: MOC of Leather is 5 (gallons of coffee/1 yard of leather) d. Suppose that both Argentina and Brazil are self sufficient i.e., they each rely on their own production for their consumption and do not trade with each other. Also assume that each nation Argentina's PPF 0 4 8 0 12 24 Coffee (gallons) Leather (yards) (d)(6,4) Brazil's PPF 0 3 6 9 0 15 30 Coffee (gallons) Leather (yards) (d)(15,3) (e)(0,8) (e)(30,0)
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devotes exactly a half of its total labor availability to the production of coffee and the rest to the production of leather. Indicate the combination of coffee and leather produced and consumed in each country on the graphs of part (a). [ANSWER] see the graph in (a). Argentina devotes 60 hours of its labor in producing coffee and 60 hours of its labor in producing leather. 10 hours are used to produce 1 gallon of coffee. 60/10 = 6 gallons of coffee is consumed in Argentina, and 60/15 = 4 yards of leather. The combination of coffee and leather produced and consumed in Argentina is (Coffee, Leather) = (6 gallons,4 yards). Brazil produces 15 gallons of coffee with 60 hours of its labor and 3 yards of leather with 60 hours of its labor. The combination for Brazil is (Coffee, Leather) = (15 gallons, 3 yards). e. Suppose each country devotes all its labor availability to the production of the commodity in which it has a comparative advantage (i.e., a relatively lower opportunity cost). Indicate the production point of each country after specialization. Again use graphs for part (a).
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