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ECON1020 S1 2023 Tutorial 2 - Answer Guide PDF

1. The document provides an answer guide for tutorial questions on the topics of opportunity cost, comparative advantage, and market transactions. 2. It uses examples like a driver's choice between music and GPS, and two flatmates' productivity at chores, to explain concepts of opportunity cost, absolute advantage, and comparative advantage. 3. It analyzes Kyle MacDonald's trading of a red paperclip for a house to discuss how his trades met the criteria for market transactions and the true opportunity cost for Kyle of obtaining the house.

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149 views4 pages

ECON1020 S1 2023 Tutorial 2 - Answer Guide PDF

1. The document provides an answer guide for tutorial questions on the topics of opportunity cost, comparative advantage, and market transactions. 2. It uses examples like a driver's choice between music and GPS, and two flatmates' productivity at chores, to explain concepts of opportunity cost, absolute advantage, and comparative advantage. 3. It analyzes Kyle MacDonald's trading of a red paperclip for a house to discuss how his trades met the criteria for market transactions and the true opportunity cost for Kyle of obtaining the house.

Uploaded by

Xavier Hill
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MACQUARIE

BUSINESS SCHOOL
Department of Economics

ECON1020 – PRINCIPLES OF ECONOMICS 1


ANSWER GUIDE FOR TUTORIAL 2
WEEK 2 (BEGINNING 27/02/2023)

Q1 THE COST OF OUR CHOICES


Watch this advertisement and answer the following questions:

1. What were the driver’s choices? What choice did the driver end up making?

2. What was the opportunity cost of that choice?

3. What does the mobile phone network T-Mobile want people to choose?

4. Is there an opportunity cost of choosing T-Mobile? If so, what is it?

ANSWER

1. The driver had the choice of either continuing to listen to music (i.e. Ariana
Grande) or using a GPS map to help her navigate. She chooses to use the GPS map.

2. Opportunity cost is the forgone benefit that would have been derived by an option
not chosen. Therefore, the opportunity cost of using a GPS map is that she gives up
her ability to listen to music. She cannot do both because her data is scarce.

3. T-Mobile wants people to choose their mobile phone network (specifically, they
want people to switch from their rivals Verizon), where data is unlimited (i.e. the
scarcity of data is removed).

4. Even though choosing T-Mobile removes the scarcity of data, there is an


opportunity cost of changing mobile networks. This opportunity cost is what you
would do with your time if you did not have to go through the process of switching
mobile phone networks, along with what you could do with any money you have to
spend to switch.

In economics, we have a special term for these kinds of costs: switching barriers.
These switching barriers are any obstacles (economic, psychological, etc.) that
prevent an individual from switching from one thing to another. They can be used to
explain why you stick with your mobile phone network (like the example above),
utilities provider, bank, etc. They can also explain some of the bigger choices you
will make in your life like why it is often difficult to change careers or even end
friendships and relationships!
MACQUARIE
BUSINESS SCHOOL
Department of Economics

The advertisement and subsequent discussion highlight the concept of opportunity


cost, and the idea that every choice involves a tradeoff. As part of the study of
choices and decisions in economics, we are concerned with what is the best or the
optimal choice. When talking about the optimal choice, we want to make the choice
that has the smallest tradeoff, i.e., the one that has the lowest opportunity cost.

Q2 SPECIALISATION AND COMPARATIVE ADVANTAGE


When people differ in their ability to produce different goods, markets allow them to
specialise. In the week 1 lecture we discovered that all producers can benefit by
specialising and trading goods. Economists distinguish who is better at producing
what in two ways: absolute advantage and comparative advantage.

1. What is comparative advantage, and how does it differ from absolute advantage?

Use the table below, which shows two flatmates’ productivities on house chores, to
answer the following problems.

Dishes Laundry
Batman 5 loads per hour 5 loads per hour
Superman 24 loads per hour 6 loads per hour

2. Which one has an absolute advantage in doing dishes? How about in doing
laundry? Which one has a comparative advantage in doing dishes? How about in
doing laundry?

3. If they want to specialise and exchange house chores, who should specialise in
doing dishes? Who should in doing laundry?

ANSWER

1. A person (or country) has absolute advantage in the production of a good if the
inputs it uses to produce this good are less than in some other person (or country).

A person (or country) has comparative advantage in the production of a particular


good if the cost of producing an additional unit of that good relative to the cost of
producing another good is lower than another person (or country’s) cost to produce
the same two goods. Or simply, whoever gives up the least when choosing one
alternative, i.e. whoever has the lowest opportunity cost, has the comparative
advantage.
MACQUARIE
BUSINESS SCHOOL
Department of Economics

2.

Dishes (D) Laundry (L)


Batman 5 loads per hour 5 loads per hour
Superman 24 loads per hour 6 loads per hour
Absolute Advantage Superman (24>5) Superman (6>5)
Comparative Advantage For every 1 load of D For every 1 load of L
Superman does, he gives up Superman does, he gives up
¼ load of L. 4 D.
For every 1 load of D For every 1 load of L
Batman does, he gives up 1 Batman does, he gives up 1
load of L. D.
¼ L < 1L : Superman has a 1D < 4D: Batman has a
comparative advantage comparative advantage

Superman has an absolute advantage in both chores. Superman has a comparative


advantage in dishes, Batman in laundry. In other words, while Batman is worse than
Superman in both chores, he is ‘least disadvantaged’ in doing laundry.

3. Superman specialises in doing dishes and Batman in doing laundry according to


their comparative advantages.

Q3 THE MARKET FOR PAPERCLIPS


Watch this video until the 4m 05s mark and discuss the following questions:

1. How did Kyle manage to trade a red paperclip for a house? Why do you think
people were willing to trade with him even though money was not involved?

2. Thinking of our definitions of markets as a way for people to exchange products


and services for their mutual benefit, do the trades that Kyle made meet the criteria
for a market transaction?

3. Was the true cost of Kyle’s new house really a single red paperclip?

ANSWER

1. Kyle posted ads on the barter section of Craigslist (America’s version of Gumtree)
and people responded with goods they were willing to trade with him. Kyle started
off trading a red paperclip for a fish pen, eventually trading all the way up to a
house. At no point did he force or coerce anyone to trade with him, and they were all
willing to trade without money. Presumably, this was because they were better off
with what Kyle was offering. It may also be the case that many of the people who
traded with Kyle valued the media attention generated by trading more highly than
MACQUARIE
BUSINESS SCHOOL
Department of Economics

whatever physical thing they were trading. Either way, these mutually beneficial
exchange made both parties better off.

2. As discussed in the Week 1 lecture, market transactions must meet 3 conditions:

• Reciprocal: so that when one person transfers a good or a service to another


person, they get something in return. Kyle’s trades meet this criterion.
• Voluntary: simply means that the trade is undertaken by free choice, without
the threat of harm if one side chooses not to exchange. As noted, Kyle did not
force anyone to trade, so they also meet this criterion.
• Competitive: a competitive market is one where numerous people are
competing for the item on offer. In Kyle’s case, anyone could make him an
offer for his items, so we have a degree of competitiveness here.

3. In reality, Kyle’s house cost much more than the red paperclip. To make these
trades he worked very hard, more than full-time, for more than a year. As we know,
time has an opportunity cost. In Kyle’s case, this would have been the income that he
could have made from working in a regular job instead of the time spent trading. In
fact, Kyle likely received too little for his red paperclip. The house he got, in Kipling,
Saskatchewan, is worth around $50,000, Canadian. Lower than the average yearly
wage in the country at the time.

DISCUSSION FORUM QUESTION


This question should be completed in your Tutorial Discussion Forum on iLearn. The due
date for this week’s submission is Sunday, March 5, 11:59 pm. See the ECON1020Tutorial
Guide for more information.

Watch this video on living standards over time.

Briefly discuss one of the many reasons for the sustained growth in living standards
(also known as “hockey stick growth”). Do you agree that living standards are likely
to continue improving in the future? Why or why not?

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