Chapter 2 Tutorial Problem Set Questions
1. Suppose that Anne and Jane each own a small farm. They both produce bananas and
cheese. Each hour, Anne can either produce 1 kilo of bananas or 1 kilo of cheese, and
Jane can either produce 3 kilos of bananas or 4 kilos of cheese. Each works 6 hours a
day.
A) Fill out the production possibilities frontier (PPF) table for Anne and Jane for one
day of work.
Bananas Cheese
Anne
Jane
B) Draw Anne’s daily PPF, placing kilos of bananas on the y-axis and kilos of cheese on
the x-axis. Label both intercepts, the axes and the slope of the PPF. Assume the PPF is
linear.
C) Draw Jane’s daily PPF, placing kilos of bananas on the y-axis and kilos of cheese on
the x-axis. Label both intercepts, the axes and the slope of the PPF. Assume the PPF is
linear.
D) What is the opportunity cost to each of 1 kilo of bananas?
E) What is the opportunity cost to each of 1 kilo of cheese?
F) Who has the comparative advantage in producing bananas? Briefly explain.
G) Who has the comparative advantage in producing cheese? Briefly explain.
H) Who has the absolute advantage in producing bananas? Briefly explain.
I) Who has the absolute advantage in producing cheese? Briefly explain.
J) In which good should each specialise?
K) Suppose that every day, Anne and Jane each spend 3 hours producing bananas and
3 hours producing cheese, so that together they produce 12 kilos of bananas and 15 kilos
of cheese. To show that this is not an efficient use of their time, find another way to
divide up their time between producing bananas and producing cheese, so that together
they still can produce 12 kilos of bananas but more than 15 kilos of cheese.
2. Suppose that Carl and David can produce the following amounts of donuts and
burgers every day.
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Donuts Burgers
Carl 50 100
David 25 75
A) Draw Carl’s daily PPF, placing donuts on the y-axis and burgers on the x-axis. Label
both intercepts, the axes and the slope of the PPF. Assume the PPF is linear.
B) Draw David’s daily PPF, placing donuts on the y-axis and burgers on the x-axis.
Label both intercepts, the axes and the slope of the PPF. Assume the PPF is linear.
C) Who has absolute advantage in donuts? In burgers? Explain your answer.
D) What is the opportunity cost to each of producing 1 donut?
E) What is the opportunity cost to each of producing 1 burger?
F) Who has comparative advantage in donuts? Briefly explain your answer.
G) Who has comparative advantage in burgers? Briefly explain your answer.
H) Assume in autarky, Carl consumes 30 donuts and 40 burgers, while David consumes
15 donuts and 30 burgers. Draw this on a new set of PFF’s.
I) If Carl and David decide to specialise and agree to trade 17 donuts for 42 burgers, are
they better off? Illustrate the gains from trade in a production table and on their PPFs.
3. Production Possibilities Quiz. Are the following statements true or false?
A. Point A represents the amounts of cars and bicycles that will be produced.
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B. Movement along the curve from point C to point A shows us the opportunity cost of
producing more cars.
C. If we have high unemployment, then the curve shifts in.
D. If an improved process for manufacturing cars is introduced, society will be able to
produce more cars and more bicycles.
4. You have been given a ticket to see Taylor Swift in concert tonight. You can’t resell
the ticket. Drake is performing on the same night and his concert is the only other
activity you are considering. A Drake ticket costs $125 and on any given day you would
be willing to pay as much as $210 to see him play. There is no other cost of seeing either
performer. What is the opportunity cost of attending the Taylor Swift concert?
Note: there is no option to see Taylor Swift tonight and Drake tomorrow.
5. Consider the true costs of traveling from Melbourne to Sydney by train or plane.
Suppose:
The train ticket costs: $150 and takes 30 hours round trip
The plane costs: $250 and takes 10 hours round trip
You value your travel time at $4 an hour.
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A) Should you take the train or the plane?
B) Can you find the $/hour that makes train and plane travel equally attractive?
