Reference no: EM131018474

Practice Questions 2

1. A country's consumption possibilities frontier can be outside its production possibilities frontier if

a. additional resources become available.

b. there is an increase in the level of technology.

c. the country engages in trade.

d. All of the above.

e. Both a and b are correct.

2. Country A and country B produce wine (w) and cloth (c). The production possibility frontier for A and B can be represented by the following equations:

A: 2w + 3c = 12

B: w + c = 5

a) Using two separate graphs, draw the PPF for both countries by plotting wine (w) on x-axis and cloth (c) on y-axis.

b) Consider the following combinations:

(i)   3 units of wine and 2 units of cloth,

(ii)  1 units of wine and 4 unit of cloth,

(iii) 2 units of wine and 2 unit of cloth.

Fill in the following grid for each of the above combinations.

Combi-nations	Country A				Country B
	Attainable	Unattainable	Efficient	Inefficient	Attainable	Unattainable	Efficient	Inefficient
(i)
(ii)
(iii)

c) What is the opportunity cost of wine in country A? What is the opportunity cost of wine in country B?

d) Who has the comparative advantage in cloth? Who has the comparative advantage in cloth wine?

e) Can there be gains from trade?

f) If both countries specialize in the production of the item they are good at, what is the maximum amount of wine and cloth that can be produced?

3. Ron and Jon are planning a party. They have one hour to prepare for the party. Ron can make snacks at a rate of 3 snacks per 15 minutes, while Jon makes snacks at 4 per 15 minutes. Ron can make party drinks at a rate of 5 per 15 minutes, while Jon makes drinks at a rate of 8 per 15 minutes.

a) Using two separate graphs, draw the PPF for Ron and Jon placing snacks on the vertical axis and drinks on the horizontal axis.

b) What is the opportunity cost of a drink for Ron? What is the opportunity cost of a drink for Jon?

c) Explain who has the absolute and comparative advantage in the production of drinks and snacks.

d) Can Ron and Jon make 16 drinks and 20 snacks in an hour? If they make 16 drinks and 20 snacks in an hour what combinations of drinks and snacks will each of them produce? Identify the solution on the graph as well as explaining in words.

e) Show how your graph will change if Ron takes a bartending class and learns to make drinks twice as fast has he could before taking the class.

f) What will the new opportunity cost of a drink be for Ron?

g) Now who has the absolute and comparative advantage in the production of drinks and snacks?

h) If Ron and Jon specialize after Ron's course, how many drinks and snacks can be made in an hour?

i)  Show how the solution to part (h) is preferable to a solution where they each spend half of their time on each activity.

4. Fireland and Redland are two small islands producing wheat and cotton. Both of them have 120 labor hours. The following table shows hours needed to produce one bushel of wheat and cotton:

	Labor hours needed to produce 1 bushel of
	Wheat	Cotton
Fireland	12	3
Redland	24	4

a) Using two separate graphs, draw the PPF for Fireland and Redland placing cotton on the vertical axis and wheat on the horizontal axis.

b) What is the opportunity cost of 1 bushel of wheat for Fireland? What is the opportunity cost of 1 bushel of wheat for Redland?

c) What is the opportunity cost of 1 bushel of cotton for Fireland? What is the opportunity cost of 1 bushel of cotton for Redland?

d) Who has the absolute advantage in the production of wheat? Who has the absolute advantage in the production of cotton?

e) Who has the comparative advantage in the production of wheat? Who has the comparative advantage in the production of cotton?

f) Can Fireland benefit from trade? Explain your answer.

5. We have the following data on the production of bread and cookies by Dolly and Molly:

Dolly can make 5 loaves of bread and no cookies in 1hr and 6 loaves of bread and 2 dozen cookies in 2hrs. Molly can make 9 loaves of bread and 3 dozen cookies in 3hrs and 2 loaves of bread and 6 dozen cookies in 2 hrs. Both have 4hrs of time available.

a) On two separate graphs, draw Molly and Dolly's PPFs placing loaves of bread on x-axis and dozens cookies on the y-axis. (Hint: You will need to convert the data you are given into production combination that can be produced using the entire 4 hrs.)

b) Who has the absolute advantage in the production of bread? Who has the absolute advantage in the production of cookies?

c) Who has the comparative advantage in the production of bread? Who has the comparative advantage in the production of cookies?