PROBLEM SET #1
Problem #1
Two individuals, Anna and Bob, are harvesting corn and tomatoes.
Anna can harvest 10 bushels of corn
OR 6 bushels of tomatoes in one hour.
Bob can harvest 4 bushels of corn OR 5 bushels of tomatoes in
one hour.
a. Who has the absolute advantage in producing tomatoes? In corn?
We can express the data in a table format to make things easier
Bushels of Corn per hour
Bushels of Tomatoes per hour
Anna
10
6
Bob
4
5
The person with the absolute advantage is the person who can produce more in a given time period, or
can produce the same in less time.
Since the time period is fixed at one hour, we simply need to see
how produces more.
Anna produces more corn than Bob, so she has the absolute advantage (AA) in corn
Anna also produces more tomatoes than Bob, so she has the AA in tomatoes
b. What is the marginal cost of harvesting corn for each individual? For producing tomatoes?
For Anna
The cost of 10 Bushels of Corn is 1 hour of time.
In that hour, she could have produced 6 bushels of
tomatoes – thus
10
6
C
T
=
, so
3
1
5
C
T
=
.
Producing one additional corn cost Anna threefifths of a
bushels of tomatoes.
Using inverses we know that
5
1
3
T
C
=
, so for every additional bushels of
tomatoes Anna harvest, it cost her fivethirds a bushels of corn.
For Bob
5
4
5 , so 1
4
4
This means that 1
5
C
T
C
T
T
C
=
=
=
You can interpret this similarly to Anna.
c. Who has the comparative advantage in harvesting corn? In producing tomatoes?
Explain your
reasoning.
The person with the lowest cost in producing a good has the comparative advantage.
So for corn, Anna
must give up 0.6 of a bushels of tomatoes, while Bob must give up 1.25 bushels of Tomatoes.
Anna
gives up less, so she has the comparative advantage (CA) in the production of corn.
Since Anna has the
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2
4
6
8
10
12
0
1
2
3
4
5
6
7
Corn
(bushels/hr)
Tomatoes
(Bushels/hr)
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0
1
2
3
4
5
6
Corn
(bushels/hr)
Tomatoes
(Bushels/hr)
4
Slope:
5
CA in the production of corn, using inverses, we know that Bob must have the comparative advantage in
the production of tomatoes.
d. Draw individual PPF’s for both Anna and Bob.
Explain the relationship between the slope of the
PPF and marginal cost for each person.
I put corn on the Y – axis, yours may look differently
The slope of each line tells us the marginal cost of the good on the xaxis.
For Anna, the cost of
producing an additional bushel of tomatoes is fivethirds a bushels of corn.
You can verify these are the
same that we calculated before.
Note: The slopes are negative – However, we are only concerned with the magnitude of the slopes.
The
slopes tell us
the degree (how large) of the cost.
The negative“ness” of the slope simply tells us that
there is a cost involved.
e. Create an EconomyWide PPF.
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 Summer '08
 Blanchard
 Supply And Demand, Anna Bob

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