ps2an - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2005 Wei Zhang Problem Set 2 – Answer Key Gains from Trade and the Production Possibilities Frontier 1. a) b) New Zealand has a comparative advantage in wheat, since it’s opportunity cost of producing wheat is lower than Australia’s opportunity cost of producing wheat. Similarly, Australia has a comparative advantage in cotton production because it has the lower opportunity cost for cotton production. Opportunity Cost New Zealand Australia Wheat 1/3 Cotton 3 Cotton Cotton 3 Wheat 1/3 Wheat c) Suppose Australia specialized in cotton to produce 600 bales, and New Zealand specialized in Wheat to produce 600 bushels. They could trade 300 of each good with each other, and thus each consume 300 bales of cotton and 300 bushels of wheat. Notice that (300,300) is outside the PPF for each country. Page 1 of 3 Cotton Wheat 200 600 Australia Cotton 600 200 New Zealand
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2. Opportunity Cost
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This note was uploaded on 07/28/2010 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at Wisconsin.

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ps2an - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005 Wei...

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