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Homework 1

# Homework 1 - d If James and Peter specialize in producing...

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Temple University, Department of Economics Instructor: Ken Chesoli Econ 1101:013 Homework 1 (Due 09/15/2010) Question 1: Brazil produces ethanol and sugar, and the land used to grow sugar can be used to grow food crops. Suppose that Brazil’s production possibilities for ethanol and food crops are as follows. Ethanol (barrels per day) Food Crops (tons per day) 70 0 64 1 54 2 40 3 22 4 0 5 Define marginal cost and use the information above to calculate marginal cost of producing a ton of food when the quantity produced is 2.5 tons per day. Question 2: Distinguish between production efficiency and allocative efficiency. Explain why many production possibilities achieve production efficiency but only one achieves allocative efficiency. Question 3: In an hour James can produced 40 caps or 4 jackets, and Peter can produce 80 caps or 4 jackets. a) Calculate James’ opportunity cost of producing a cap b) Calculate Peter’s opportunity cost of producing a cap c) Who has the comparative advantage in producing caps?

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Unformatted text preview: d) If James and Peter specialize in producing the goods in which each one has a comparative advantage, and they trade 1 jacket for 15 caps (terms of trade), who gains from the specialization and trade? Question 4: Suppose that Peter buys a new machine for making jackets that enable him to make 20 jackets an hour. (He can still make only 80 caps per hour). a) Who has a comparative advantage in producing jackets b) Can peter and James still gain from trade? c) Would Peter and James still be willing to trade 1 jacket for 15 caps? Explain your answer. Question 5: capital accumulation and technological change bring economic growth, which means that the PPF keeps shifting outward: production that was unattainable yesterday becomes attainable today; and production that is unattainable today will become attainable tomorrow. Why doesn’t this process of economic growth mean that scarcity is being defeated and that it will one day be gone?...
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