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

#2 a. Fill in table

Computers GrainGermany 15/mo. 5 tons/mo.

Poland 4/mo. 4 tons/mo.

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

F. What makes two countries have different OC?

• Available resources/tech• Varying education/skilled labor• Quality of L, L, K