Question

10) Suppose the US and Mexico both can produce cars and beer. The following chart shows what 100 workers can produce in one day in each country. Country Car Production-100 Beer Production (truckload)- 100 or workers workers United States 300 or 1200 Mexico 200 1000 or For this question, assume they can use the same workers to produce any amount in between the two and the opportunity cost is constant straight PPF a) Use the info in the table to draw the PPF for each country in two separate graphs. (hint: mark the two end points given and connect them with a line.) b) Which country has absolute advantage in making cars? Who has absolute advantage in making beer? c) Calculate the opportunity cost for making cars in each country. Who has comparative advantage in making cars? d) Calculate the opportunity cost for making beer in each country. Who has comparative advantage in making beer? e) Given your answers above, can both countries benefit from trading with one another? Why or whv not? f) Assume that before the US was consuming 175 cars and 500 truckloads of beer. Mexico was consuming 90 cars and 450 truckloads of beer. Label those points on the PPF with U and M respectively. g) Suppose each country specializes completely in what the productive where they have an advantage. How much will be produced by each country and total? How does this compare to the total production before specializing. h) Suggest a trade that will make both countries better off than before. Show how they have benefited from this trade. [you can show in numbers or on the graph)

Answer 1

PPF shows the various combination of two goods an economy can produce with full utilization of it's available resources.

Absolute advantage refers to how efficient an economy is in producing a good without any reference to other country.

Comparative advantage refers to which country has a lower opportunity cost in producing a good.

Hence US produces more cars because they produce more cars per day with same amount of labor.Hence US has absolute advantage in cars.

Countey Cal production - 100 Beer wolkes produchon-100 wockers tuited States 300 1200 Mexico 200 looo a) PPF shows the various combination of too goodo peoduced by a country with full utilization of its inputs. So for united states 100 workers can produce 300 units of cars or 1200 units of beer in a day. which can be graphed as: - B been beer Mexico 1000 fig-1 Fiq-2 300 Tears 200 Icars X axis axis Y = Cars - beer Similaily Lor Mexico 1000 beer can be figi is for united 200 cars produced states & can be produced or Fig 2 is for Mexico. 6 Absolute advantage means who is more efficient ie who given the same inputs can produce more So its just a question of who could produce more Cars beer. As can be seen from the table us can produce 300 cars with 100 Woekers Coneareas Mexico can. produce only 200 cars with 100 workers.

Similarly Mexico can produce 1000 beers in a day by using 100 workers whereas US can produce 1200 beers in a day by using 100 workers .Hence US has absolute advantage in beer as well .

C) US is producing 300 cars which is costing him 1200 beers.So opportunity cost of car in US =beer produced by 100 workers in US /cars produced by 100 workers in US

1200/300=4

Hence opportunity cost of cars in US is equal to 4 beers.

Similarly opportunity cost of cars in Mexico can be calculated as=beer produced by 100 workers in Mexico/cars produced by 100 workers in Mexico

=1000/200

=5

Opportunity cost of cars in Mexico is equal to 5 beers.

Comparative advantage in making cars is refered as which country has lower opportunity cost for making cars.

US has opportunity cost of 4 beers (for 1 car) and Mexico has opportunity cost of 5 beers.hence US has lower opportunity cost hence comparative advantage in making cars.

D) Opportunity cost of producing beer in US =cars produced by 100 workers in US/beer produced by 100 workers in US

300/1200=.25

Similarly for Mexico it is 200/1000

I.e =.2

US has .25 opportunity cost for beer and Mexico has .2 opportunity cost for beer . Country has a comparative advantage in a product having lower opportunity cost.Hence Mexico has a comparative advantage in producing beer.