Answers to Study Questions for Test #1

Here is the key to the sample problems. Please let me know if you believe any of these to be incorrect.

1-A, 2-B, 3-A, 4-A, 5-C, 6-A,

7-C, 8-D, 9-D, 10-C, 11-C, 12-B,

13-A, 14-D, 15-C, 16-D,

17-C, 18-C, 19-B, 20-B, 21-D, 22-B, 23-D

24-B, 25-C, 26-B, 27-B, 28-A, 29-B,

30-C, 31-C, 32-B, 33-C, 34-C

Short answer:

A. True; two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods. All that's necessary is that each country have a comparative advantage in some good.

B. False; it is not true that some people have a comparative advantage in everything they do. In fact, no one can have a comparative advantage in everything. Comparative advantage reflects the opportunity cost of one good or activity in terms of another. If you have a comparative advantage in one thing, you must have a comparative disadvantage in the other thing.

C. False; it is not true that if a trade is good for one person, it can't be good for the other one. Trades can and do benefit both sides, especially trades based on comparative advantage. If both sides didn't benefit, trades would never occur.

Chocolate Ice Cream

Homework problem #5 has you consider the market for chocolate ice cream. After our discussion in class on Wednesday, you should be able to understand the related readings: chapter 3. In each part of the problem figure out what happens to demand or supply. (In each part only one of them will move.) You should be able to draw a market diagram with a change in demand/supply like figures 3-12 and 3-13.

The supply and demand diagram is a handy analytical tool. Start with an initial equilibrium, then move demand or supply. You should then be able to tell from the diagram how price and quantity changes.

Good luck

Comments on Problem Set #1

I’ve received a few inquiries regarding the homework and I’d like to share what I’ve shared with everyone else concerning a few of the problems.

Problems 1 and 2:

“How much should we write?” A few sentences each should be suffice. One sentence probably won’t cover the necessary details. Five sentences would be saying too much.

Problem 3:

“I saw how you did the Gilligan and Mary Ann example in class but I’m not sure how to answer this problem.”

First, find the opportunity cost of producing one unit of each good. The “cost” is in terms of the other good. The following example applies to Tivoli. You’re given that in one month they can produce either 30 pounds of spaghetti (no meatballs) or 50 pounds of meatballs (no spaghetti). You can find the opportunity cost by starting with the equation:

30 lbs spaghetti = 50 lbs meatballs

To get the opportunity cost of spaghetti in terms of meatballs, solve the above equation for 1 lb of spaghetti. That is, divide both sides by 30. So

30 lbs/30 = 50lbs/30 or 1 lb spaghetti = 5/3 lbs meatballs.

Similarly, the opportunity cost of a pound of meatballs can be found by dividing both sides by 50. So 30 lbs/50 = 50 lbs/30 or 1 lb meatballs = 3/5 spaghetti.

Do the same for Frivoli. When you have calculated the opportunity costs for both goods in both tribes, you can then compare who has the lowest opportunity costs and, hence, comparative advantages.

“Do we have to do a trade?” Well, I think part C just asks if they could gain from a trade. The answer ought to be obvious. Also, if you think “hmm, what is a good trade”, you ought to conclude that a price of 1 lb meatball for 1 lb of spaghetti ought to be a mutually advantageous trade. You can probably show trading some amount of meatballs for spaghetti at this price will allow each tribe to consume outside their PPF.

Problem 4:

You should be able to use the “trick” above. You can set each person’s batting average to their free throw percentage. Then solve each for 1. You’ll be able to rank the best hitters, in terms of foregone free throw percentage. The top two hitters in terms of opportunity cost will be the worst two free throw shooters, relatively speaking. (Solving for best free throw shooters, you’ll find the ranking then is opposite.) Be careful, the argument is on relative ability to hit/shoot, not absolute ability to hit/shoot.

I hope this helps. Good luck.

First Assignment

Taking Stock in America

Resiliency, Redundancy and Recovery in the U.S. Economy

Federal Reserve Bank of Dallas, 2001 Annual Report

W. Michael Cox and Richard Alm

The article may be found at the following link: http://www.dallasfed.org/fed/annual/2001/index.html

This article is viewable in *.html or *.pdf formats. You are advised to download the *.pdf format as it contains many photos, diagrams, and tables that are missing from the *.html document. The relevant pages of the report are pages 3-24.