Question

1.The slogan for MasterCard commercials typically center around the slogan, “There are some things money can’t buy…” Do you agree with the premise that there are some things that money can’t purchase? Explain. The basic premise of the MasterCard commercials are that when something can’t be physically purchased, it is “priceless”. Is this statement accurate? Explain. Is there a distinction between the idea that money cannot purchase all things and that when money cannot buy something it is “priceless”? In other words, is there a difference in the two portions of this questions? ** Hint: Don’t get caught up in the specifics of the commercials, think about the term “Priceless”.

2. From the article, “To Understand a Tax on Mexican Imports, Consider the Avocado”:

The article insinuates that domestic (U.S. based) Avocado producers will plant more trees after a tax is implemented. Why would this be true? How does a price change impact the decision to produce? Your explanation should include a definition and description of Opportunity Cost and the Law of Increasing Costs.

3.What is the distinction between Absolute Advantage and Comparative Advantage? Is it possible for a person to have an Absolute Advantage without having the Comparative Advantage? Is the opposite possible?

Show with two separate PPF’s how Comparative Advantage is used to determine trade using the following data: Beer	Burritos
Anders	10	25
Hoffman	12	28

Answer 1

3. Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

Comparative Advantage

According to this theory, A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Yes, it is possible for a person to have an absolute advantage without comparative advantage.

Yes, it is also possible that a person have comparative advantage without absolute advantage.

Hoffman has an absolute advantage in the production of oth Burritos and Beer because it is able to produce more of both goods.

Anders:

10 burritos = 25 beer

1 burritos = 25/10 = 2.5 beer

1 beer = 10/25 = 0.4 burritos

Opportunity cost of producing 1 burritos is 2.5 beer and 1 beer is 0.4 burritos.

Hoffman:

12 burritos = 28 beer

1 burritos = 28/12 = 2.33 beer

1 beer = 12/28 = 0.43 burritos

Opportunity cost of producing 1 burritos is 2.33 beer and 1 beer is 0.43 burritos.

Opportunity cost of producing 1 burritos is lower when it is produced by Hoffman. So, Hoffman has comparative advantage in producing burritos while Anders has comparative advantage in producing beer.