Chapter 3

1. In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine.

a. Who has the absolute advantage in production of sweaters? In the production of wine? How can you tell?

b. Calculate the opportunity cost of producing 6 additional sweaters in France and in Tunisia. Which country has a comparative advantage in the production of sweaters?

c. Calculate the opportunity cost of producing 6 additional bottles of wine in France and Tunisia.

Which country has a comparative advantage in the production of wine?

d. In this example, is absolute advantage the same as comparative advantage, or not?

e. In what product should France specialize in producing? In what product should Tunisia specialize in producing?

2. Consider trade between Japan and Indonesia involving computers and toaster ovens. The number of computers and toaster ovens that a worker can produce in each country is shown in the table below.

In Japan                                                 In Indonesia

One worker can make                 12 computers                    8 computers

30 toaster ovens                       24 toaster ovens

Say that in a world without trade, the Japanese economy has 100,000 workers working on these two products, with 60,000 of them working to produce computers and 40,000 of them working to produce ovens. Indonesia is devoting a total of 240,000 workers to these two products, using half of their workers to produce computers and half of their workers to produce ovens. Now answer the following

questions:

a. Who has the absolute advantage in the production of computers? In the production of ovens?

Explain how you can tell.

b. Who has the comparative advantage in the production of computers? In the production of ovens?

Explain your answer using the concept of opportunity cost.

c. Sketch a production possibility frontier for each country in the situation before there is trade. Put computers on the vertical axis and toaster ovens on the horizontal axis for each production possibility frontier.

d What general pattern of trade, if any, will benefit both parties: that is, who should export computers and who should export ovens?

e. Calculate the levels of production in these economies without trade, and then construct a specific example of production and trade in which both sides are better off and able to consume at least as much of both products as a result of trade than they would have before trade.

3. The table that follows shows how the average costs of production for airplanes at a certain factory changes as the number of airplanes built at that factory increases.

a. Based on this data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale?

b. If the equilibrium quantity of airplanes demanded is 400, can this economy take full advantage of economies of scale? What about if quantity demanded is 300 airplanes? 200 airplanes? 100 airplanes?

c. Explain how international trade could make it possible for even a small economy to take full

advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.

Average Cost

Quantity Built                  of Production

50                               $30 million each

100                             $20 million each

200                             $15 million each

300                             $10 million each

400                             $10 million each