1. Explain why the farmer’s opportunity cost of producing 1lb of meat is 2lb of potatoes.

• It takes farmer 20 hours to = 1 lb. meat• It takes farmer 10 hours to = 1lb. Potatoes• In the same 20 hours- he could have produced

2 lb. of potatoes. • …so in making 1 lb. meat , he has given up the

opportunity to make 2lb. potatoes

2. Explain why the rancher’s opportunity cost of producing 1lb of meat is 1/8 lb of potatoes.

• It takes rancher 1 hr to = 1lb meat• It takes rancher 8 hrs to = 1lb. Potatoes• In the 1 hr he used to make meat, he could

have produced 1/8 lb potatoes• …so in making 1lb meat, he has given up the

opportunity to make 1/8 lb potatoes

3. Maria can read 20 pg. of econ in 1hr. or she can read 50 pg. of sociology in 1hr. She spends 5 hrs. per day studying.

• A. draw Maria’s PPF

• B. what is her opportunity cost of reading 100 pages of sociology?

• She can read 100 pg. soc. in 2 hours• In the same 2 hours she could have read 40 pg.

econ

100 econ

250 soc.

4. Given the following information about US and Japanese labor and production:

• 1 American worker can produce 4 cars / year • 1 Japanese worker can produce 4 cars / year • 1 American worker can produce 10 tons

grain / year• 1 Japanese worker can produce 5 tons grain

/year• There are 100 million workers in each country

a. construct a table similar to table 3-1 in your text

1 workers production

cars /yr tons/grain/yr

US 4 10

Japan 4 5

b. graph PPF for US and Japanese economies*remember – they have 100 million workers

Cars/millions

Tons grain/ millions

400

500 1000

Japan

US

c. For the US, what is the opportunity cost of 1 car (show your work)

• OC of 1 car = 10 tons 4 cars

• d. For the US, what is the opportunity cost of 1 ton of grain (show your work)

• OC of 1 ton = 4 cars 10 tons

= 2.5 tons grain x 100 mill. workers

= 0.4 cars x 100 mill workers

e. For Japan, what is the opportunity cost of 1 car (show your work)

OC 1 car = 5 tons 4 cars

f. For Japan, what is the opportunity cost of 1 ton of grain (show your work)

OC 1 ton = 4 cars 5 tons

= 1.25 tons x 100 mill. workers

= 0.8 cars x 100 mill. workers

g. Which country has the absolute advantage for cars? …..grain? Explain w/ #

• Absolute advantage for cars = • No one – each input produces same output• Absolute advantage for grain= • US – each(same) input produces more output

h. Which country has the comparative advantage for cars? …..grain? Explain w/ #

• Comp. adv cars = • Japan – have lower o.c. of producing cars• Japans oc of 1 car = 1.5 tons vs. US oc of 1 car =

2.5 tons

• Comp adv grain = • US – have lower oc of producing grain • US oc of 1 ton grain = .4 cars vs Japans oc of 1

ton grain = .8 cars

i. Without trade: ½ of each countries workers produce cars and ½ produce grain. Calculate how many cars and tons of grain are produced by each country.

• US • 50 mil x 4 cars = 200 mil cars• 50 mil x 10 tons = 500 mil tons• Japan• 50 mil x 4 cars = 200 mil cars• 50 mil x 5 tons = 250 mil tons• Totals • 400 mil cars and 750 mil tons

….so let’s specialize and trade• US produces only grain = 1 billion tons • Japan produces only cars = 400 million cars• Total world production has increased• Was 400 m cars and 750 m tons

• Trade : • US gives up 300 million tons for 200 million

cars• Compare to letter ( i )

US No trade: 200 m cars 500 m tonsTrade: 200 m cars 700 m tons

JapanNo trade: 200 m cars 250 m tonsTrade: 200 m cars 300 m tons