500

400

300

200

100

500 1000 1500 2000 2500

U.S. PPF for Cars and T-Shirts

Cars

T-Shirts

U.S has 50,000 Hours of Labor with which it can produce either cars of shirts

It takes…25 hours to produce a shirt

100 Hours to produce a car

Question 1: Graph the U.S. PPF for Cars and Shirts

Hours of labor = 50,000Hours to produce shirts 100

Hours of labor = 50,000Hours to produce shirts 25

Question 2: What is the Opportunity Cost of Producing a shirt (in terms of cars) in the United States?

The U.S can produce 500 cars and 2000 shirts within the available 50,000 hours of labor.

U.S has 50,000 Hours of Labor with which it can produce either cars of shirts

It takes…25 hours to produce a shirt

100 Hours to produce a car

Which means, the opportunity cost to produce a shirt is ¼ the cost to produce a car

Question 3: Now assume that Mexico can also produce cars and shirts with its 15,000 hours of labor. However, in Mexico it takes 25 hours to produce a shirt and 25 hours to produce a car. Graph Mexico’s PPF.

Mexico PPF for Cars and Shirts

600500400300200100

100 200 300 400 500 600

What is the opportunity cost of producing shirts in Mexico?

•Mexico can produce 600 shirts within the available hours of labor.•Meanwhile, Mexico can also produce 600 Cars within the same hours of labor. •Thus, the opportunity cost to produce 1 shirt is the same as producing 1 car.

Question 4: Which country has the absolute advantage in producing shirts? Which country has the absolute advantage in producing cars?

Absolute advantage in shirts, U.S. or Mexico?No country has an absolute advantage in producing shirts because the cost of producing one shirt in the U.S. and Mexico is both 25 hours.

Absolute advantage in cars, U.S. or Mexico?Mexico has the absolute advantage in producing cars because the cost of producing one car in Mexico is 25 hours which is less that 100 hours for one car in the U.S.

Question 5: Should these two countries trade? Why or why not? If they should trade, which product should the United States specialize in, and why?

In theory the countries should trade. But, the cost in the United States to produce 1 shirt is 1/4 of cars and in Mexico, the cost of producing 1 shirt is 1 car. Therefore there would be no gains in the trade because U.S. and Mexico have nothing to trade since both countries are able to produce the same amount of t-shirts. The benefit would be that Mexico would export more of their cars because in 25 hours (3/4 less time then U.S.to produce cars), Mexico can produce 600 cars while the U.S. will only produce 500 cars in a longer time frame.