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Ch 3 Study Guide • #1• Angela is a college student• She has 5 hours / wk for pottery hobby• Makes 2 clay pots/hour or 4 coffee mugs/hour• In 5 hours = 10 pots or 20 mugs
• A. Draw ppf 20 mugs
10 pots
B. What is Angela’s OC of 1 pot ? ……10 pots?
• OC of 1 pot = 4 mugs/hr2 pots / hr
• OC of 10 pots= takes 5 hours to make 10 pots …in 5 hours she could make 20 mugs
= 2 mugs
C. Angela’s OC of 1 mug? …..10 mugs?
• OC of 1 mug = 2 pots/hr 4 mugs/hr
• OC of 10 mugs = takes 2.5 hours to make 10 mugs
• ……in 2.5 hours she could make 5 pots
= .5 pots
D. Why is ppf straight and not bowed out?
• Technology and resources for production are the same.
• She can switch from one good to the other at a constant rate
B. Graph the production possibilities frontier for each country
15
5
4
4
Computer
GrainGrain
Computer
Germany Poland
C. What is OC of computer in Germany? ….ton of grain?
• OC of computer = 5 tons15 comp.
OC of ton of grain = 15 comp. 5 tons
= 1/3 ton grain
= 3 computers
D. What is OC of computer in Poland? ….ton of grain?
• OC of computer = 4/4 = 1 ton grain• OC of ton of grain = 4/4 = 1 computer
E. Which country has the absolute advantage in coputers?......grain?
Computers GrainGermany 15/mo. 5 tons/mo.
Poland 4/mo. 4 tons/mo.
F. Which country has comparative advantage in computers?.....grain?
Germany OC of computer = 1/3 ton grain Poland OC of computer = 1 ton grain
Germany OC of ton grain = 3 computersPoland OC of ton grain = 1 computer
G. Each country should tend toward specialization in the production of which good? Why?
• Germany specializes in computers b/c they have the lower OC
• Poland specializes in grain b/c they have the lower OC
H. Range of prices for computers and grain ?
Germany OC of computer = 1/3 ton grain Poland OC of computer = 1 ton grain
Germany OC of ton grain = 3 computersPoland OC of ton grain = 1 computer
I. Price of 2 computers for 1 tonSpecialize and trade 4 computers for 2 tons
15
5
4
4
Computer
GrainGrain
Computer
Germany Poland
11 ; 2
4; 2
Now, both countries are operating outside of their PPF
J. Productivity doubles in Poland
Computers GrainGermany 15/mo. 5 tons/mo.
Poland 8/mo. 8 tons/mo.
Which country has absolute advantage in computers and grain?
K. After production doubled, comparative adv in comp and grain ?
Germany OC of computer = 1/3 ton grain Poland OC of computer = 1 ton grain
Germany OC of ton grain = 3 computersPoland OC of ton grain = 1 computer
• Has comp. adv. changed? • No- ratios and OC are still the same
K. …continued…Has material welfare of either country changed?
15
5
4
4
Computer
Grain Grain
Computer
Germany Poland
11 ; 2
4; 2
8
8
4;6
Poland’s has increased: now have more choices than before : Same trade still allows them to be outside of new PPF **Increase Production = Increase Standard of Living
L. How does analysis change if each country has 10 million workers?
• It wouldn’t• The ratios and OC are still the same , the
numbers simply multiply by 10 million
#3 a. Fill in table
Cars ComputersUS 4/mo. 20/mo.
Russia 1/mo. 5/mo.
B. Which country has absolute adv. in cars? …computers?
C. Which country has comparative advantage in cars? ….computers?
US OC 1 car = 20/4 = 5 computersRuss OC 1 car = 5/1 = 5 computers= Neither
US OC 1 computer = 4/20 = 1/5 carRuss OC 1 computer = 1/5 = 1/5 car= Neither
D. Are there any gains to be made from trade?
• NO! • Each can get same tradeoff between the
goods by being self sufficient
• E. Pinpoint the “source for gains from trade”• Lower OC
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