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WEEK 3
TUTORIAL 3
COMPARATIVE ADVANTAGE: THE BASIS FOR TRADE
Reading
Text: Ch 2, and Ch 8 (pp204210
Ch 2 Problems: 1, 6, 7, 9, 10
Ch 8; Review Questions 1, and 4
Problems: 2 and 3
Problems
1
In the time it takes Ted to wash a car he can wax onethird of a car. Thus, the
opportunity cost to Ted of washing one car is onethird of a wax job. In the time
it takes Dan to wash a car, he can wax onehalf of a car; the opportunity cost to
Dan of washing one car is onehalf 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.
6
Point
a
is unattainable. Point
b
is efficient and attainable. Point
c
is attainable
but inefficient.
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.
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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.
10
a
The maximum possible coffee output is 36 kilos per day (12 from Peng,
24 from Jara).
b
Their maximum possible output of nuts is also 36 kilos per day (12 from
Jara, 24 from Peng).
c
Peng should be sent to pick nuts, since his opportunity cost (half a kilo of
coffee per kilo of nuts) is lower than Jara’s (two kilos of coffee per kilo of
nuts). Since it would take Peng only one hour to pick four kilos of nuts, he
can still pick 10 kilos of coffee in his five working hours that remain.
Added to Jara’s 24 kilos, they will have a total of 34 kilos of coffee per
day.
d
Jara should be sent to pick coffee, since her opportunity cost (half a kilo
of nuts per kilo of coffee) is lower than Peng’s (two kilos of nuts per kilo
of coffee). It will take Jara two hours to pick eight kilos of coffee, which
means that she can still pick eight kilos of nuts, giving a total between
them of 32 kilos per day of nuts.
e
To pick 26 kilos of nuts per day, Peng should work full time picking nuts
(24 kilos per day) and Jara should spend one hour per day picking nuts
(two kilos per day). Jara would still have five hours available to devote to
coffee picking, so she can pick 20 kilos of coffee per day.
Ch 8 Review Questions
1
The figure below shows the PPC for a fourworker economy. Point A, the
vertical intercept, shows the maximum number of hot dogs the economy can
produce (with all four workers producing only hot dogs). Similarly, point B, the
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This note was uploaded on 08/06/2011 for the course FIN 3616 taught by Professor Henry during the Three '11 term at University of New South Wales.
 Three '11
 henry

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