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1001majorch2

# 1001majorch2 - ECON1001AB Dr.KafuWONG KKL925 CliffordCHAN...

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ECON 1001 AB Introduction to Economics I Dr. Ka-fu WONG Second week  of tutorial sessions KKL 925 Clifford CHAN KKL 1109 [email protected]

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Covered and to be covered Covered last week Dr. Wong finished kf001.ppt and covered up to #44 of kf002.ppt You should have at least read up to Chapter 1 Thinking like an economist and Chapter 2 Comparative advantage: the basis for exchange . If not, please press hard on them. We are getting to the first midterm! Start reading chapter 3 and 4 Your first midterm will cover chapter 1 – chapter 4 To be covered in the tutorial sessions this week Problems in chapter 2: #1, #3, #5, #7 and #9 You are advised to work on the even ones as well
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
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 C 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
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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