ProblemSets_TypedAnswers - PROBLEM SET #1 Problem #1 Two...

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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 three-fifths 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 five-thirds 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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0 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 x-axis. For Anna, the cost of producing an additional bushel of tomatoes is five-thirds 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 Economy-Wide PPF.
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This note was uploaded on 02/06/2012 for the course ECON 251 taught by Professor Blanchard during the Summer '08 term at Purdue University-West Lafayette.

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ProblemSets_TypedAnswers - PROBLEM SET #1 Problem #1 Two...

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