Question 1

Differences in opportunity cost allow for gains from trade.

Accepted Answer

If two individuals or countries have different opportunity costs for producing a certain good or service, then they can specialize in what they are relatively better at and trade with each other to obtain the goods or services they are relatively worse at producing. This leads to gains from trade as both parties are better off than if they tried to produce everything on their own.

Question 2

Suppose Hank and Tony can both produce corn.If Hank's opportunity cost of producing a bushel of corn is 2 bushels of soybeans and Tony's opportunity cost of producing a bushel of corn is 3 bushels of soybeans,then Hank has the comparative advantage in the production of corn.

Accepted Answer

Hank has a lower opportunity cost of producing a bushel of corn, as he only gives up 2 bushels of soybeans compared to Tony who gives up 3 bushels of soybeans. Therefore, Hank has the comparative advantage in producing corn.

Question 3

Timmy can edit 2 pages in one minute and he can type 80 words in one minute.Olivia can edit 1 page in one minute and she can type 100 words in one minute.Timmy has an absolute advantage and a comparative advantage in editing,while Olivia has an absolute advantage and a comparative advantage in typing.

Accepted Answer

Timmy can edit 2 pages in one minute, while Olivia can only edit 1 page in one minute. Therefore, Timmy has an absolute advantage in editing. 
To determine comparative advantage, we need to look at the opportunity cost of each task. The opportunity cost of editing for Timmy is 40 words (since he can type 80 words in one minute), while the opportunity cost of editing for Olivia is 100 words (since she can type 100 words but can only edit 1 page in one minute). Therefore, Timmy has a comparative advantage in editing as well. 
On the other hand, Olivia can type 100 words in one minute, while Timmy can only type 80 words in one minute. Therefore, Olivia has an absolute advantage in typing. And the opportunity cost of typing for Olivia is only editing 1/2 a page (since she can edit 1 page in one minute), while the opportunity cost of typing for Timmy is editing 1 page. Therefore, Olivia has a comparative advantage in typing.

Question 4

In one month,Moira can knit 2 sweaters or 4 scarves.In one month,Tori can knit 1 sweater or 3 scarves.Together,they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

Accepted Answer

Moira has a higher opportunity cost for scarves (1 sweater = 2 scarves) compared to Tori (1 sweater = 3 scarves), making Moira relatively better at knitting sweaters and Tori relatively better at knitting scarves. By specializing in these tasks, they maximize their combined output.

Question 5

It takes Anne 3 hours to make a pie and 4 hours to make a shirt.It takes Mary 2 hours to make a pie and 5 hours to make a shirt.Anne should specialize in making shirts and Mary should specialize in making pies,and they should trade.

Accepted Answer

According to the principle of comparative advantage, each person should specialize in the activity for which they have a lower opportunity cost. Anne has a lower opportunity cost in making shirts because she gives up 3/4 of a pie for each shirt (since she can make a pie in 3 hours and a shirt in 4 hours), whereas Mary gives up 2.5 pies for each shirt (since she can make a pie in 2 hours and a shirt in 5 hours). Conversely, Mary has a lower opportunity cost in making pies because she gives up 0.4 of a shirt for each pie (since she can make a shirt in 5 hours and a pie in 2 hours), whereas Anne gives up 0.75 of a shirt for each pie (since she can make a shirt in 4 hours and a pie in 3 hours). Therefore, Anne should specialize in making shirts and Mary in making pies, and they should trade to maximize their combined output.

Question 6

It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car.It takes Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car.Courtney and Ross cannot gain from specialization and trade,since it takes each of them 6 hours to produce 1 bushel of corn.

Accepted Answer

Courtney has a comparative advantage in washing and polishing cars because she can do it in less time than Ross. Ross, by focusing on producing corn, where their productivity is the same, allows both to benefit from specialization and trade based on Courtney's lower opportunity cost for car washing.

Question 7

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

Accepted Answer

When people specialize in activities in which they have a comparative advantage, they become more productive and efficient. This leads to an increase in goods and services produced, which can be traded with others. Through trade, everyone can access a wider variety of goods and services at lower prices, leading to increased standards of living for all members of society.

Question 8

The principle of comparative advantage states that,regardless of the price at which trade takes place,everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage.

Accepted Answer

The principle of comparative advantage suggests that countries or individuals will benefit from trade if they specialize in producing goods for which they have a lower opportunity cost, not regardless of the price at which trade takes place. The benefits from trade depend on the relative prices of goods, which should reflect comparative advantages.

Question 9

Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin.Fred and Barney both gain from the exchange.We can conclude that,for Barney,the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes.

Accepted Answer

The statement that both Fred and Barney gain from the exchange does not necessarily imply anything about Barney's opportunity cost of producing 1 pumpkin relative to 2 tomatoes. It only indicates that each values what they receive more than what they give up.

Question 10

The gains from specialization and trade are based on absolute advantage.

Accepted Answer

The gains from specialization and trade are based on comparative advantage, which is the ability to produce a good or service at a lower opportunity cost than other producers. Absolute advantage, on the other hand, is the ability to produce more of a good or service than other producers with the same amount of resources.

Question 11

Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods.

Accepted Answer

Even if one country can produce both goods more efficiently, it can specialize in producing the good in which it has a comparative advantage and trade with the other country. This allows both countries to benefit from trade and increase overall efficiency.

Question 12

When there are two people and each is capable of producing two goods,it is possible for one person to have a comparative advantage over the other in both goods.

Accepted Answer

According to the principle of comparative advantage, each person should specialize in producing the good in which they have a lower opportunity cost (the opportunity cost being the other good they could have produced instead). Therefore, it is not possible for one person to have a comparative advantage in both goods, as they would have to have a lower opportunity cost in both goods compared to the other person.

Question 13

Ellie and Brendan both produce apple pies and vanilla ice cream.If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream,Ellie has a comparative advantage in the production of ice cream.

Accepted Answer

Ellie's opportunity cost of producing one apple pie is higher in terms of ice cream, meaning she has to give up less ice cream to produce apple pies compared to Brendan. This implies Brendan has a comparative advantage in apple pies, and Ellie in ice cream, as comparative advantage is determined by who has the lower opportunity cost in production.

Question 14

If one producer has the absolute advantage in the production of all goods,then that same producer will have the comparative advantage in the production of all goods as well.

Accepted Answer

Absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources. Comparative advantage, however, involves producing goods at a lower opportunity cost. It is possible for one producer to have an absolute advantage in all goods but still have a comparative advantage in only some, as comparative advantage is determined by which goods can be produced at the lowest relative opportunity cost, not the highest volume.

Question 15

If a country has the comparative advantage in producing a product,then that country must also have the absolute advantage in producing that product.

Accepted Answer

Comparative advantage refers to a lower opportunity cost of producing a product compared to another country, while absolute advantage refers to being able to produce a product with fewer resources than another country. A country can have a comparative advantage in a product without necessarily having an absolute advantage in producing it.

Question 16

Unless two people who are producing two goods have exactly the same opportunity costs,then one person will have a comparative advantage in one good,and the other person will have a comparative advantage in the other good.

Accepted Answer

This is the basic principle of comparative advantage, which means that each person or country should specialize in producing the good in which they have a comparative advantage and trade with others to obtain the other goods they need.

Question 17

In an economy consisting of two people producing two goods,it is possible for one person to have the absolute advantage and the comparative advantage in both goods.

Accepted Answer

It is not possible for one person to have both absolute advantage and comparative advantage in both goods. Absolute advantage refers to the ability to produce a good with fewer resources, while comparative advantage refers to the ability to produce a good at a lower opportunity cost. It is possible for one person to have absolute advantage in both goods, but they cannot have comparative advantage in both goods at the same time.

Question 18

If one producer is able to produce a good at a lower opportunity cost than some other producer,then the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good.

Accepted Answer

The producer with the lower opportunity cost is said to have a comparative advantage, not an absolute advantage. Absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Question 19

Harry is a computer company executive,earning $200 per hour managing the company and promoting its products.His daughter Quinn is a high school student,earning $6 per hour helping her grandmother on the farm.Harry's computer is broken.He can repair it himself in one hour.Quinn can repair it in 10 hours.Harry's opportunity cost of repairing the computer is lower than Quinn's.

Accepted Answer

Harry's opportunity cost of repairing the computer is $200 (the amount he earns per hour), whereas Quinn's opportunity cost is $6 (the amount she earns per hour). Since $200 is greater than $6, Harry's opportunity cost is higher than Quinn's.

Question 20

Zora can produce 4 quilts in a week and she can produce 1 corporate website in a week.Lou can produce 9 quilts in a week and he can produce 2 corporate websites in a week.Zora has the comparative advantage in quilts and the absolute advantage in neither good,while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods.

Accepted Answer

Comparative advantage is determined by who has the lower opportunity cost in producing a good, not by who produces more. Zora has the comparative advantage in corporate websites because she gives up fewer quilts to produce a website compared to Lou. Lou has the absolute advantage in both goods because he can produce more of both quilts and websites in a week than Zora.

Quiz 3: Interdependence and the Gains From Trade: Part B