TUTORIAL 2

TUTORIAL 2 - TUTORIAL 2 WEEK 3 COMPARATIVE ADVANTAGE: THE...

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TUTORIAL 2 WEEK 3 COMPARATIVE ADVANTAGE: THE BASIS FOR TRADE Reading Text: Ch 2, and Ch 8 (pp204-210 Ch 2 Review Questions: 4 and 5 4. A reduction in the number of hours worked each day will shift all points on the PPC inward, toward the origin. Technological innovations that boost labour productivity will shift all points on the PPC curve outward, away from the origin.
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5 Failure to specialise means failure to exploit the wealth-creating possibilities of the principle of comparative advantage. Wealthy people buy most of their goods and services from others, not because they can afford to do so but because the high opportunity cost of their time makes performing their own services too expensive. Ch 2 Problems: 1, 2, 4, 6, 7 and 9 1 In the time it takes Ted to wash a car he can wax one-third of a car. Thus, the opportunity cost to Ted of washing one car is one-third of a wax job. In the time it takes Dan to wash a car, he can wax one-half of a car; The opportunity cost to Dan of washing one car is one-half of a wax job. Because Ted’s opportunity cost of washing a car is lower than Dan’s, Ted has a comparative advantage in washing cars. 2 In the time it takes Ted to wash a car he can wax three cars. Thus, the opportunity cost to Ted of washing one car is three wax jobs. In the time it takes Dan to wash a car, he can also wax three cars; the opportunity cost to Dan of washing one car is three wax jobs. Because Dan’s opportunity cost of washing a car is the same as Ted’s, neither has a comparative advantage in washing cars. In the special case where neither person has a comparative advantage, there will be no gains from specialisation and trade. 4 0 32 64 Dresses per day Loaves of bread per day 6 Point a is unattainable. Point b is efficient and attainable. Point c is attainable but inefficient.
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0 32 64 Dresses per day Loaves of bread per day a b c 32 16 24 28 16 18 7 The new machine doubles the value of the vertical intercept of Helen’s PPC, but leaves the horizontal intercept unchanged. 0 32 64 Dresses per day Loaves of bread per day 64 9 The upward rotation of Helen’s PPC means that, for the first time, she is now able to produce at any of the points in the shaded region. Not only has her menu of opportunity increased with respect to dresses, but it has increased with respect to bread as well.
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TUTORIAL 2 - TUTORIAL 2 WEEK 3 COMPARATIVE ADVANTAGE: THE...

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