Question

1. we looked at the notion of both absolute advantage and comparative advantage by examining a hypothetical economy producing wine and cloth. Let us continue to develop our understanding of these important concepts through some more numerical examples. Note: The questions in this section , they build on each other in order.

Imagine a hypothetical economy with two workers - Worker A and Worker B. Assume that Worker A can produce either 10 bottles of wine or 5 yards of cloth in one day. Worker B can also produce wine and cloth.

In order to have an absolute advantage in wine, Worker B will have to produce at least----------------  bottles of wine. In order to have an absolute advantage in cloth, Worker B will have to produce at least ----------- yards of cloth.

Technically, absolute advantage is based on which worker has the lowest absolute cost of production, rather than the highest rate of production. However, as long as we assume that production is linear in the amount of time spent producing the good in question, this is an easy (and substantively equivalent) transformation. For example, if Worker A can produce 10 bottles of wine in a day, then it takes Worker A 1/10^th of a day to produce one bottle, which we refer to as the labor cost of production.

The labor cost of producing one yard of cloth for Worker A is ------------th of a day. Based on your answers from Question 1, in order for Worker B to have an absolute advantage in both wine and cloth, the labor costs of producing wine would have to be less than------------ th of a day, and the labor costs of producing cloth would have to be less than------------ th of a day.

Specialization according to absolute advantage will be beneficial for if one worker has an absolute advantage in one good while the other worker has an absolute advantage in the other good. Let's look at specialization according to absolute advantage where the two workers have absolute advantages in different goods.

What would Worker B's production level be if Worker B had an absolute advantage in wine and Worker A had an absolute advantage in cloth? To make the numbers more precise, assume that Worker B can produces 2 more units per day of one good and one less unit per day of another good.

--------------------- bottles of wine and------------------  yards of cloth.

    Assume that the two workers do not specialize. Instead, both spend half of their day producing cloth and half of their day producing wine for their own consumption. How much wine and cloth would each worker consume? (Assume that the workers are capable of producing fractions of a unit.)

Worker A would consume----------  bottles of wine and ------------- yards of cloth.

Worker B would consume--------------  bottles of wine and  -------------yards of cloth.

Now assume that the two workers specialize according to their absolute advantage. After spending the entire day producing the good in which they have an absolute advantage, they each trade half of their production to the other worker.

If they each trade half of their production to the other worker after specializing according to their absolute advantage, then what does each worker produce and consume?

Worker A produces  ------------units of -------------------- (insert name of good) and consumes ------------ bottles of wine and  -------------yards of cloth.

Worker B produces  ------------units of ------------- (insert name of good) and consumes  ---------------bottles of wine and  -----------yards of cloth.

    The pattern of specialization according to absolute advantage above is beneficial only to the extent that each worker has an absolute advantage in one good. There is no reason to believe that this will always be the case. For example, as before, assume that Worker A can produce either 10 bottles of wine or 5 yards of cloth in one day. However, now assume that Worker B can produce either 24 bottles of wine or 6 yards of cloth.

Worker--------------  now has an absolute advantage in wine, and Worker ----------- now has an absolute advantage in cloth.

1. The labor cost of producing the two different goods for the two different workers is:

Worker A: ----------- of a day for cloth and -----------------of a day for wine.

Worker B: -------------- of a day for cloth and ----------------of a day for wine

1. What is the opportunity cost of producing the two different goods for the two different workers?

For Worker A, the opportunity cost of producing a yard of cloth is ----------------------- (of a) bottle(s) of wine, and the opportunity cost of producing a bottle of wine is ------------ (of a) yard(s) of cloth.

For Worker B, the opportunity cost of producing a yard of cloth is ------------- (of a) bottle(s) of wine, and the opportunity cost of producing a bottle of wine is ------------ (of a) yard(s) of cloth.

Worker -----------------has a comparative advantage in cloth, and Worker-------------- has a comparative advantage in wine.

Answer 1

Answers are given in the blanks.

Imagine a hypothetical economy with two workers - Worker A and Worker B. Assume that Worker A can produce either 10 bottles of wine or 5 yards of cloth in one day. Worker B can also produce wine and cloth.

In order to have an absolute advantage in wine, Worker B will have to produce at least-------11--------- bottles of wine. In order to have an absolute advantage in cloth, Worker B will have to produce at least ------6----- yards of cloth.

Technically, absolute advantage is based on which worker has the lowest absolute cost of production, rather than the highest rate of production. However, as long as we assume that production is linear in the amount of time spent producing the good in question, this is an easy (and substantively equivalent) transformation. For example, if Worker A can produce 10 bottles of wine in a day, then it takes Worker A 1/10th of a day to produce one bottle, which we refer to as the labor cost of production.

The labor cost of producing one yard of cloth for Worker A is -------1/5-----th of a day. Based on your answers from Question 1, in order for Worker B to have an absolute advantage in both wine and cloth, the labor costs of producing wine would have to be less than------1/10------ th of a day, and the labor costs of producing cloth would have to be less than------1/5------ th of a day.

Specialization according to absolute advantage will be beneficial for if one worker has an absolute advantage in one good while the other worker has an absolute advantage in the other good. Let's look at specialization according to absolute advantage where the two workers have absolute advantages in different goods.

What would Worker B's production level be if Worker B had an absolute advantage in wine and Worker A had an absolute advantage in cloth? To make the numbers more precise, assume that Worker B can produces 2 more units per day of one good and one less unit per day of another good.

----------12----------- bottles of wine and---------4--------- yards of cloth.

Assume that the two workers do not specialize. Instead, both spend half of their day producing cloth and half of their day producing wine for their own consumption. How much wine and cloth would each worker consume? (Assume that the workers are capable of producing fractions of a unit.)

Worker A would consume-----5----- bottles of wine and -------2.5------- yards of cloth.

Worker B would consume-------6------- bottles of wine and ------2-------yards of cloth.

Now assume that the two workers specialize according to their absolute advantage. After spending the entire day producing the good in which they have an absolute advantage, they each trade half of their production to the other worker.

If they each trade half of their production to the other worker after specializing according to their absolute advantage, then what does each worker produce and consume?

Worker A produces -------5-----units of ---------Cloth----------- (insert name of good) and consumes ----6-------- bottles of wine and -----2.5--------yards of cloth.

Worker B produces -------12-----units of -------wine------ (insert name of good) and consumes ------6---------bottles of wine and -----2.5------yards of cloth.

The pattern of specialization according to absolute advantage above is beneficial only to the extent that each worker has an absolute advantage in one good. There is no reason to believe that this will always be the case. For example, as before, assume that Worker A can produce either 10 bottles of wine or 5 yards of cloth in one day. However, now assume that Worker B can produce either 24 bottles of wine or 6 yards of cloth.

Worker-------B------- now has an absolute advantage in wine, and Worker -----B------ now has an absolute advantage in cloth.

The labor cost of producing the two different goods for the two different workers is:
Worker A: ---1/5-------- of a day for cloth and -------------1/10-----------of a day for wine.

Worker B: ---------1/6----- of a day for cloth and ----------1/24----------of a day for wine

What is the opportunity cost of producing the two different goods for the two different workers?
For Worker A, the opportunity cost of producing a yard of cloth is ------------2----------- (of a) bottle(s) of wine, and the opportunity cost of producing a bottle of wine is ------0.5------ (of a) yard(s) of cloth.

For Worker B, the opportunity cost of producing a yard of cloth is -----4-------- (of a) bottle(s) of wine, and the opportunity cost of producing a bottle of wine is ------0.25------ (of a) yard(s) of cloth.

Worker --------A---------has a comparative advantage in cloth, and Worker-------B------- has a comparative advantage in wine