Dr. Barry Haworth
University of Louisville
Department of Economics
Honors Econ 201-01
Spring 2012
1. The opportunity costs are as
follows:
a) Bill's opportunity cost for producing each additional unit of cake is 2
units of pie
b) Bill's opportunity cost for producing each additional unit of pie is 0.5 of
a unit of cake
c) Ted's opportunity cost for producing each additional unit of cake is 0.3 of
a unit of pie
d) Ted's opportunity cost for producing each additional unit of pie is 3 units
of cake
2. Given the calculations above, we know:
(b)
Bill has a comparative advantage in producing pie
(c) Ted has a comparative advantage in producing cake
3. Given that the opportunity cost of producing widgets is the same in Country A as it is in Country B (same for wristwatches), we know:
(e) Neither Country B nor Country A have a comparative advantage in producing widgets
(f)
Neither Country B nor Country A have a comparative
advantage in producing wristwatches
4. a. For Bill, the opportunity cost of producing each additional unit of cake is 3 units of pie
4. b. For Ted, the opportunity cost of producing each additional unit of cake is 2 units of pie
5. The PPC in the table reflects increasing opportunity costs (answer a)
To see this, calculate the opportunity cost of producing each additional unit of automobile tire – as you move from A to B, then B to C, and so forth – you’ll find the the opportunity cost numbers increase; and as you do the same in the opposite direction for rubber mats, you’ll find that as you increase your production of those mats, the values you get for opportunity cost will increase as well.
6. a. Answer = E. There is an increase
(shift outward) in the PPC that affects both goods.
Explanation: if there is a migration of laborers into Country X, then there is an increase in the available quantity of labor within Country X. As a result, we get a general outward shift in the PPC of Country X because this change affects the potential output of this country.
b. Answer = B. There is movement from a point that's on this PPC to a point inside the PPC.
Explanation: unemployment signals a change in demand – so increasing unemployment leads to movement to points that are further inside the PPC, but no shift (recall that all points inside the PPC represent points where we do not have full employment). We move to a point further inside the curve to reflect the fact that we are producing below potential.
c. Answer = I. There is a decrease (pivot inward) in the PPC that affects only wheat.
Explanation: if there is a decrease in the productivity associated with producing wheat, then the potential for producing wheat (only) has decreased.
d. Answer = E. There is an increase in
the PPC for both goods.
Explanation: if there is an improvement in the technology associated with producing both goods, then the potential for producing these two goods is higher.
e. Answer = D. There is movement between
2 points, down along the PPC (i.e. toward rye).
Explanation: if the demand for rye is increasing and full employment is maintained throughout, then we are moving from one point on the PPC to another point on the PPC – obviously toward the higher demanded good (which in this case is rye).
f. Answer = J. There is a decrease
(shift inward) in the PPC that affects both goods.
Explanation: if there is a decrease in the availability of inputs used with producing rye within Country X, then there is a decrease in the potential for producing rye (not wheat) and the PPC shifts inward for rye (or we can say pivots inward – showing a decrease in the potential for rye, but no change for wheat).