Question

1. distinguish between absolute advantage and comparative advantage .

2.Define free Rider

3. Externality curve shift-New power lines and impact on existing home market

4.production possibility curve with break through in technology and recession.

=2000 mars max

=1500 skittles max

=currently 700 mars and 800 skittles

=what is the opportunity cost of 200 more mars bars

=breakthrough in caramel production allows them to produce 2500 mars max

= recession hits , depict what will happen in mars and skittle markets

5.complementary good depiction -french fry prices down , what happen in the ketchup market

6.substitute good depiction -fish prices down , what happen in the chicken market .

Answer 1

1. Absolute advantage means the ability of one country to produce a good using fewer resources than another country.

Example India and China can both produce Cotton and Wheat. India produces 100 quintals of wheat and China only 20 quintals then India has absolute advantage in wheat.

Comparative advantage means that one country has a lower opportunity cost (relative cost) in the production of a good than another country.

Example: Example India and China can both produce Cotton and Wheat. India produces 20 quintals of wheat and China 25 quintals then China has absolute advantage in wheat. India also produces 10 quintals of cotton whereas China produces 50.

In this case, China is clearly having absolute advantage in both wheat and cotton. However, if we compare opportnity cost then India shoud focus on wheat and China on cotton as opportunity cost of wheat is less for India.

2. Free rider: It is a condition in which people can enjoy the use of a good without paying for it, and this happens due from non excludability. Example: A street show. People cannot be excluded from using the good, because it is not possible to charge a price. Is often associated with public goods like roads.

3. New power lines will create positive externality of production as private cost will be more than social costs. This will increase demand for new houses as power lines will make power availability more.

4. Question is unclear.

5. As french fries and ketch up are complements then they have negative relationship. It means that french fries being cheaper will increase demand for ketch up.

6. Substitute have negative relationship. when fish prices down then chicken demand will go down as people will prefer fish over chicken.