Question

2. Suppose Jotunheim and Muspelheim both make meat and swords. Meat Meat 2000 1600 Muspelheim Jotunheim Swords Swords 0 1200 500 Who has the absolute advantage in Meat? Who has the comparative advantage in Swords? What is the opportunity cost of 1 meat in Jotunheim? What is the opportunity cost of 1 meat in Myspelheim? Put a point A in Jotunheim that is possible but not efficient. Put a point B in Jotunheim that is possible and an improvement from point A. Put a point C in Muspelheim that is possible and efficient. Finally, show the effect of an increase in population in Muspelheim on the PPF (assuming labor is the resource needed to produce Meat and Swords)

Answer 1

Ans) PPF shows possible combination of two goods that a country can produce. Any point inside the PPC shows possible but inefficient outcome. Any point on PPC shows possible and efficient outcome. Any point outside the PPC shows unattainable outcome.

Absolute advantage is when one can produce more goods with equal or less resources than the other.

Here Jotunheim can produce more meats, therefore it has absolute advantage in meat. 2000>1600.

Here Muspelheim can produce more swords, therefore it has absolute advantage in swords. 500<1200

Comparative advantage is when one can produce good with less opportunity cost than the other.

1) Opportunity cost of meat in jotunheim= swords sacrificed ÷meat gained = 500÷2000 = 0.25

Opportunity cost of sword in Jotunheim = meat sacrificed ÷ sword gained = 2000÷500 = 4

2) Opportunity cost of meat in Muspelheim = swords sacrificed ÷ meat gained = 1200÷1600 = 0.75

Opportunity cost of swords = meat sacrificed ÷ swords gained = 1600÷1200 = 1.33

3) Here Joutenheim has less opportunity cost of producing meat, therefore it has comparative advantage in meat.

Here Muspelheim has less opportunity cost of producing swords, it has comparative advantage in producing swords.

4) An increase in factors of production, technology etc leads to an outward shift of PPC.

2. Suppose Jotunheim and Muspelheim both make meat and swords. Meat Meat 2000 1600 Muspelheim Jotunheim BS C A< Swords Swords 0 1200 500 Who has the absolute advantage in Meat? Who has the comparative advantage in Swords? What is the opportunity cost of 1 meat in Jotunheim? What is the opportunity cost of 1 meat in Myspelheim? Put a point A in Jotunheim that is possible but not efficient. Put a point B in Jotunheim that is possible and an improvement from point A. Put a point C in Muspelheim that is possible and efficient. Finally, show the effect of an increase in population in Muspelheim on the PPF (assuming labor is the resource needed to produce Meat and Swords)