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Problems Chapter 3

The document describes production possibilities frontiers and opportunity costs for the US, Japan, and Canada. It states that American workers can produce 4 cars or 10 tons of grain per year, while Japanese workers can produce 5 cars or 5 tons of grain. With 100 million workers each, the US has a comparative advantage in grain and Japan has a comparative advantage in cars. The document then provides an example of how trade could make both countries better off by allowing them to specialize and consume beyond their initial production possibilities.

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138 views5 pages

Problems Chapter 3

The document describes production possibilities frontiers and opportunity costs for the US, Japan, and Canada. It states that American workers can produce 4 cars or 10 tons of grain per year, while Japanese workers can produce 5 cars or 5 tons of grain. With 100 million workers each, the US has a comparative advantage in grain and Japan has a comparative advantage in cars. The document then provides an example of how trade could make both countries better off by allowing them to specialize and consume beyond their initial production possibilities.

Uploaded by

trangnha1505
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 DOCX, PDF, TXT or read online on Scribd
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2. American and Japanese workers can each produce 4 cars a year.

An American
worker can produce 10 tons of grain a year, whereas a Japanese worker can
produce 5 tons of grain a year. To keep things simple, assume that each country has
100 million workers.

a. For this situation, construct a table analogous to the table in Figure 1.

a. Graph the production possibilities frontiers for the American and Japanese
economies.

b. For the United States, what is the opportunity cost of a car? Of grain? For Japan,
what is the opportunity cost of a car? Of grain? Put this information in a table
analogous to Table 1.

 For the United States, the opportunity cost of a car is the amount of grain that
worker cannot produce. Since a US worker can produce either 4 cars or 10 tons of
grain per year, if she produces 1 more car, she can’t produce 10/4 or 2.5 tons of
grain. If she produces one more ton of grain, she can’t produce 0.4 cars.

 In Japan the opportunity cost of producing one more car is not being able to
produce 5/4 or 1.25 tons of grain. If that worker instead produces one more ton of
grain, she can’t produce 4/5 of a car, or 0.8 cars.
d. Which country has an absolute advantage in producing cars? In producing grain?

 The US has an absolute advantage in producing grain.

 No country has an absolute advantage in the production of cars

e. Which country has a comparative advantage in producing cars? In producing grain?

 The U.S. has a comparative advantage in producing grain.

 Japan has a comparative advantage in producing cars.

 In the US, a car is twice as expensive as in Japan. It costs 2.5 tons of grain to buy a car
in the U.S, but only 1.25 tons in Japan.

 In Japan, a ton of grain is twice as expensive as it is in the U.S. It costs 0.8 cars to buy a
ton of grain in Japan but only 0.4 cars in the U.S.

f. Without trade, half of each country's workers pro- duce cars and half produce grain.
What quantities of cars and grain does each country produce?

 If half the workers in each nation produce cars and half grain:

- Japan produces 50 million workers x 4 cars/worker = 200 million cars and 50 million
workers x 5 tons of grain/worker = 250 million tons of grain.

- The US produces 50 million workers x 4 cars per worker = 200 million cars and 50
million workers x 10 tons of grain/worker = 500 million tons of grain.

g. Starting from a position without trade, give an example in which trade makes each
country better off

Suppose, starting at the initial


situation in part the U.S. takes
25 million workers out of
car production and puts them
into grain production. The US
now produces 100 million
cars and 750 million tons of
grain.
Suppose Japan takes 25 million
workers out of grain production
and has them produce
cars. They now produce 300
million cars and 125 million
tons of grain.
Suppose, starting at the initial
situation in part the U.S. takes
25 million workers out of
car production and puts them
into grain production. The US
now produces 100 million
cars and 750 million tons of
grain.
Suppose Japan takes 25 million
workers out of grain production
and has them produce
cars. They now produce 300
million cars and 125 million
tons of grain.
 Suppose, starting at the initial situation in part the U.S. takes 25 million workers out of
car production and puts them into grain production. The US now produces 100 million
cars and 750 million tons of grain.

 Suppose Japan takes 25 million workers out of grain production and has them produce
cars. They now produce 300 million cars and 125 million tons of grain.

4. Suppose that there are 10 million workers in Canada and that each of these workers
can produce either 2 cars or 30 bushels of wheat in a year.

a. What is the opportunity cost of producing a car in Canada? What is the


opportunity cost of producing a bushel of wheat in Canada? Explain the
relationship between the opportunity costs of the two goods.
 Maximum number of cars that can be produced: 10 million workers x 2
cars/worker = 20 million cars

 Maximum number of wheat that can be produced: 10 million workers x 30


bushels of wheat/worker = 300 million bushels of wheat

 The opportunity cost of producing 1 car is 300/20=15 bushels of wheat

 The opportunity cost of producing 1 bushels of wheat is 20/300=0.067 car

b. Draw Canada’s production possibilities frontier. If Canada chooses to


consume10 million cars, how much wheat can it consume without trade? Label this
point on the production possibilities frontier.

c. Now suppose that the United States offers to buy 10 million cars from Canada in
exchange for 20 bushels of wheat per car. If Canada continues to consume 10
million cars, how much wheat does this deal allow Canada to consume? Label this
point on your diagram. Should Canada accept the deal?

 Canada will accept the deal, because after trade, they will able to consume above the
PPF.

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