sol_odd_02

sol_odd_02 - Problem #1, Chapter 2 Ted can wax 4 cars per...

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Problem #1, Chapter 2 Ted can wax 4 cars per day or wash 12 cars. Tom can wax 3 cars per day or wash 6. What is each man’s opportunity cost of washing a car? Who has comparative advantage in washing cars?
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Solution to problem #1 (1) Both Ted and Tom have two options to choose from: waxing cars or washing cars If one chooses to wax (wash) cars, one will have to forgo washing (waxing) cars Opportunity Cost The value of your next best alternative that you must forgo in order to engage in your current activities
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Solution to problem #1 (2) Ted If Ted chooses to wash a car, he will have to forgo having 1/3 car waxed The 1/3 car wax forgone is actually his opportunity cost of having a car wash Opportunity cost = relative efficiency of two activities Units of forgone activity you can do in a given amount of time/ Units of current activity you can do in a same given amount of time T Waxing Washing Ted 4/hr 12/hr Tom 3/hr 6/hr
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Solution to problem #1 (3) Applying the above formula, we can also compute Ted’s opportunity cost of waxing a car 12 units of car wash forgone in an hour / 4 units of car wax can be performed in an hour Ted’s opportunity cost of waxing a car is 3 units of car wash Tom Similarly, Tom’s opportunity cost of washing a car is 3 units of car wax forgone in an hour/ 6 units of car wash can be performed in an hour Tom’s opportunity cost of washing a car is 0.5 unit of car wax
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Solution to problem #1 (4) We can also compute Tom’s opportunity cost of waxing a car using the formula discussed 6 units of car wash forgone in an hour / 3 units of car wax can be done in an hour Tom’s opportunity cost of waxing a car is 2 units of car wash Who has a comparative advantage in washing cars?
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Solution to problem #1 (5) Comparative advantage Notion of comparative advantage refers to one’s relative efficiency in doing an activity over that of the other person In other words, if one has a comparative advantage in an activity over another person’s, one will have a lower opportunity cost of doing the activity than the other person Since Ted has a lower opportunity cost of washing cars (1/3 units of car wax forgone) than Tom whose opportunity cost of washing cars is 1/2 units of car wax forgone), TED HAS A COMPARATIVE ADVANTAGE IN WASHING A CAR Same logic can be applied to comparative advantage in waxing cars
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Problem #3, Chapter 2 Toby can produce 5 gallons of apple cider or 2.5 ounces of feta cheese per hour. Kyle can produce 3 gallons of apple cider or 1.5 ounces of feta cheese per hour. Can Toby and Kyle benefit from specialization and trade? Explain.
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Solution to problem #3 (1) In order to answer this question, we will need to compute the opportunity costs of producing apple cider and feta cheese per hour Both Toby and Kyle have two options to choose from: producing apple cider or feta cheese T Apple cider Feta cheese Toby 5/hr 2.5/hr Kyle 3/hr 1.5/hr
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This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.

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sol_odd_02 - Problem #1, Chapter 2 Ted can wax 4 cars per...

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