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Eco 304 Fall 2010 Sample Questions for Midterm 1

# Eco 304 Fall 2010 Sample Questions for Midterm 1 - Sample...

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Sample Questions for Midterm 1 1. Pat and Mike work together in a small business that makes boxes and towels. Pat can make 15 boxes per hour, but only 10 towels, whereas Mike can make 10 boxes and 15 towels. a. For Pat and Mike, what is the opportunity cost of a box? Who has a comparative advantage in boxes? b. For Pat and Mike, what is the opportunity cost of a towel? Who has the comparative advantage in towels? c. Suppose the Pat and Mike each have 20 hours per week to work. If each worked for 10 hours on each product, how many of each would they make? d. Suppose that Pat and Mike each specialize in the direction of his comparative advantage. How much of each product would they make in total? Answers a. For Pat, if he went from all towels to all boxes he’d be going from 10 towels to 15 boxes, so giving up 1 towel raises box output by 1.5. Saying the same thing in another way, to raise box output by 1 requires Pat to produces 2/3 of a towel less. Hence, Pat’s opportu nity of a box is 2/3 of a towel. For Mike, going from all towels to all boxes means trading off 15 towels for 10 boxes, so that Mike opportunity cost of a box is 3/2 foregone towels. Hence, Pat has a comparative advantage in box production.

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