Questions and Reviews A.1) As we know, the general shape of a PPF is a bowed out, concave curve.

The reason behind it is the increasing opportunity cost. But if the opportunity cost is constant, and the input is equally efficient to produce both the products on the PPF, we get a linear shaped PPF. A.7) Economists oppose policies that restrict trade among nations because trade benefits all the parties involved. Some nations are good at producing certain goods, and some nations are good at producing some other good, and these nations can trade with each other goods that they specialize in. According to David Ricardo, if every country specializes in what the make best, and encourage trade between them, then they could make much more than two countries that employ tariffs or quotas. Problems and Applications 3.a) Pats opportunity cost for making pizza is a gallon of beer. Kris opportunity cost for the same is 2/3 a gallon of beer. Pat has the absolute advantage because he only spends 2 hours to make a pizza, less than Kris. Pat has the comparative advantage because he has a lower opportunity cost of a gallon of beer. b) Pat will trade away pizza in exchange for root beer . c) The highest price of pizza in terms of root beer that will make both roommates better off is 2/3 gallons of root beer. If the price were higher than that, then Kris would prefer making her own pizza (at an opportunity cost of 2/3 gallons of root beer)

rather than trading for pizza that Pat makes. The lowest price of pizza in terms of root beer that will make both roommates better off is 1/2 gallon of root beer. If the price were lower than that, then Pat would prefer making her own root beer (she can make 1/2 gallon of root beer instead of making a pizza) rather than trading for root beer that Kris makes. 4. a) The opportunity cost of producing a car is 15 tons of wheat. The opportunity cost of producing a bushel of wheat is 1/15th of a car. If more workers work towards producing the car, the less the production of wheat will be. But since all the workers are equally efficient, the opportunity cost is constant. That also explains the linear PPF , since a linear PPF represents constant opportunity cost

b)If Canada chooses to consume 10 million cars , it can consume 150 million bushels of wheat without trade . Diagram is in the attached file. c) Canada could produce an additional 10 million cars (20 million total) by devoting every worker to producing cars. They could exchange 10 million of these cars for 20 bushels of wheat per car, for a total of 200 million tons of wheat, resulting in 50 million bushels more than the car-export workers could produce if they were producing wheat. Diagram is in the attached file.

6) a) From the table we can see that in Boston , one worker can produce 4 pairs of Red socks and 2 pairs of white socks per hour . So , in the time period of producing 1 pair of white socks , he can produce 2 pairs of Red socks .

So the price of white socks in terms of red socks in Boston is 2 pairs of Red socks . As for Chicago , one worker can produce pairs of Red socks and 1 pair if white socks per hour . So , in the time period of producing 1 part of white socks , he can produce 2 pairs of Red socks . So , the price of white socks in terms of red socks in Boston is 2 pairs of Red socks . b) Absolute advantage Boston has an absolute advantage when it comes to production of Red Socks. It requires 15 minutes to produce 1 pair of red socks unlike Chicago, which requires 30 minutes. Boston also has an absolute advantage when it comes to production of white socks. It requires 30 minutes to produce 1 part of red socks unlike Chicago, which requires an hour to do the same. Comparative advantage Nobody has the comparative advantage since both the cities sacrifice 0.5 pairs of socks for producing every red sock White socks Nobody has the comparative advantage since both the cities sacrifice 2 pairs of socks for producing every white socks . c. These cities will not trade with each other as theres no advantage as such if they trade since neither of them have a competitive advantage.

Suppose workers become even more productive, in Boston such that a worker in Boston can now produce 6 pairs of red socks per hour and 3 pairs of white socks. How does this information affect your answers above? Explain d.

With the new figures, Boston, one worker can produce 6 pairs of Red socks and 3 pairs of white socks per hour. So, in the time period of producing 1 pair of white socks, he can produce 2 pairs of Red socks. So the price of white socks in terms of red socks in Boston is 2 pairs of Red socks. As for Chicago, one worker can produce pairs of Red socks and 1 pair if white socks per hour . So , in the time period of producing 1 part of white socks , he can produce 2 pairs of Red socks . So , the price of white socks in terms of red socks in Boston is 2 pairs of Red socks .

And now Boston can produce 6 pairs of red socks per hour, 3 pairs of white socks.

Absolute advantage Boston still has an absolute advantage when it comes to production of Red Socks. It requires 10 minutes to produce 1 pair of red socks unlike Chicago, which requires 30 minutes. Boston has improved their time by 5 minutes.

Boston also has an absolute advantage when it comes to production of white socks. It requires 20 minutes to produce 1 part of red socks unlike Chicago, which requires an hour to do the same. Boston has reduced their time of production for each white socks by 10 minutes.

Comparative advantage Nobody has the comparative advantage since both the cities sacrifice 0.5 pairs of socks for producing every red sock . Nobody has the comparative advantage since both the cities sacrifice 2 pairs of socks for producing every white socks .

The cities still shouldnt trade because neither of them have competitive advantage over the other in both the goods. Even though Bostons production has increased, their opportunity cost is still the same. And Chicagos production is unchanged so the opportunity cost remains the same.