Question

Mac and Izzie each produce computers and television sets. Mac can produce 60 computers per month or 60 television sets per month. Izzie can produce 30 computers per month or 120 television sets per month.

Q1. Use the information above to draw the production possibility frontier(PPF) for Mac and another for Izzie on the graph. Put computers on the horizontal axis and TV sets on the vertical axis. Maintain this throughout.

Q2. Calculate the opportunity cost for producing computers and the opportunity cost of producing television sets for Mac and Izzie (Show how you calculated the opportunity cost. Make sure you have the correct units. You may use a table to show this information.)

Q3. Before trade, Mac produces and sells 20 computers and 40 TV set per month. Izzie produces and sells 20 computers and 40 TV set per month. Show this information on the graph and put it in a table.

Q4. Using the opportunity cost calculated in Q2, indicate which good Mac and Izzie have a comparative advantage in. Explain your answer.

Q5. Put the specialization decision of Mac and Izzie in a table, just as we did in the example from class and then, show the specialization points on the graph.

Q6. To trade, Mac and Izzie have to come up with a price range that works for them to trade computers and TV sets.

a. What is the range of computer prices that would be acceptable to both Mac and Izzie when trading? Explain your answer

b. What is the range of TV set prices that would be acceptable to both Mac and Izzie when trading? Explain your answer Note: The price in Q7 is not the answer you should write in Q6.

Q7. At a price of 1 computer = 2 televisions, assume Izzie decides to buy 30 computers from Mac. Make a table and complete the table by indicating how many computers and how many television sets Mac and Izzie will each end up with after trade.

Q8. Show the answers from Q7 on the graph you have been drawing so far. On this graph you must have all the following:

a. Computers on horizontal axis and TV sets on vertical axis

b. The PPFs from Q1

c. The before trade points from Q3

d. The specialization points from Q5

e. The after trade point from Q7.

Answer 1

Part 1

Before Trade	Computers	TV Sets
Mac	60	60
Lzzie	30	120

Part 2

Opportunity Cost is the cost of foregone alternative. Opportunity Cost = What one Sacrifice / What one gains

Mac

Opportunity Cost of producing 1 Computer

= 60 / 60 = 1 TV Set

Opportunity Cost of producing 1 TV set

= 60 / 60 = 1 Computer

Lzzie

Opportunity Cost of producing 1 Computer

= 120 / 30 = 4 TV Sets

Opportunity Cost of producing 1 TV Set

= 30 / 120  

= 0.25 TV sets

Part 3

Before Trade	Computers	TV Sets
Mac	20	40
Lzzie	20	40

Mac

Lzzie

Part 4

Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners.

Since Opportunity Cost of Mac in producing Computers is less, so Mac has comparative advantage in production of Computers. Since Opportunity Cost of Lzzie in producing TV sets is less, so Lzzie has comparative advantage in production of TV Sets.