Question

	Jeff	Loriss
tea	2	0.5
cofee	1.5	1.5

Now consider two farmers, Jeff and Lorissa, that can produce the above quantities of coffee OR tea.

10) What is the opportunity cost for each to produce tea? Coffee?

11) Who has a comparative advantage in producing tea? Why?

12) Suppose Jeff and Lorissa decided to trade coffee and tea with one another. Between what exchange ratios of coffee for tea (how many tons of coffee per ton of tea) would they both benefit from trade? Between what exchange ratios of tea for coffee (how many tons of tea per ton of coffee) would they both benefit from trade?

13) Which of the following is correct about comparative advantage?

a. A country has the comparative advantage in a good if it can produce more of the good than another country.

b. A country has the comparative advantage in the production of a good if it can produce the good at a lower opportunity cost than another country.

c. Some countries will have a comparative advantage in everything.

d. If a country has a comparative advantage it will always be a wealthy country.

14) The bowed out shape of the production possibility frontier implies that as production of one good

a. decreases, society must give up increasing amounts of another good.

b. decreases, society must give up constant amounts of another good.

c. increases, society must give up decreasing amounts of another good.

d. increases, society must give up increasing amounts of another good.

Answer 1

10) For Jeff

Opportunity cost of 1 unit tea = 1.5/2 =0.75

Opportunity cost of 1 unit coffee = 2/1.5 =1.33

For Loriss

Opportunity cost of 1 unit tea = 1.5/0.5 = 3

Opportunity cost of 1 unit coffee = 0.5/1.5 = 0.33

11. To determine the comparative advantages we compare the opportunity cost for Jeff and Loriss. when we compare the opportunity cost of one unit tea for Jeff and Loriss, we see that the opportunity cost for tea is lower in Jerry. therefore Jerry enjoys a comparative advantage in production of tea.

12. If each of them specializes in what they enjoy a comparative advantage and import the other good, they will be better off.

Jerry enjoys a comparative advantage in tea and produce tea. recall the opportunity cost of 1 unit of tea in Loriss is equal to 3 units of coffee. Therefore, Loriss would be open to accepting a trade of 1 unit of tea for upto 3 unit of coffee.

Loriss enjoys a comparative advantage in coffee and produce coffee. Recall the opportunity cost of 1 unit of coffee in Loriss is equal to 1.33 units of tea. Therefore, Loriss would be open to accepting a trade of 1 unit of coffee for upto 1.33 unit of tea.

13.    A country has a comparative advantage in production of a good if it can produce the good at a lower opportunity cost than another country.

Therefore the answer is b.

14. The bowed out shape of the production possibility frontier implies that as production of one good increases, society must give up increasing amounts of another good.

Therefore, the answer is d.