Question

Tom and Jerry are two severely competitive rivals who like both milk and cheese. Their weekly production possibilities are shown in the following table.

Choices	Tom		Jerry
	Milk	Cheese	Milk	Cheese
Choice A	50oz	0	24oz	0
Choice B	0	10oz	0	8oz

1. Who has absolute advantage in Milk? Why?
2. Who has absolute advantage in Cheese? Why?
3. Who has comparative advantage in Milk? Why?
4. Who has comparative advantage in Cheese? Why
5. Draw Tom PPC [keep cheese on the x axis for uniformity].
6. Draw Jerry’s PPC [keep cheese on the x axis for uniformity].
7. Who should specialize in what? Why?
8. Fill up the table below:

	Tom		Jerry
	Milk	Cheese	Milk	Cheese
Assume that before trade consumption bundle is given as	20oz			5oz
Production when each decides to specialize

1. Plot “Before trade or specialization consumption bundle” on the Tom and Jerry’s PPF in question e and f respectively. Call it point X

10. Plot “Production when specialization takes place” on the Tom and Jerry’s PPF in question e and f respectively. Call it point Y

11. Calculate the mutually beneficial range of trading agreement.

50. Calculate the fair exchange rate between Milk and Cheese that will make both parties better off and fill up the table below

	Tom		Jerry
	Milk	Cheese	Milk	Cheese
Before trade consumption bundle is given as	20oz			5oz
Production when the rivals decide to specialize
After trade consumption bundle (Jerry wants to consume only 5oz cheeses as he did before specialization)				5oz

1000. Plot “After trade consumption bundle” on the Tom and Jerry’s PPF in question c and d respectively. Call it point Z.
14. Based on your findings, explain why Tom would like to trade Jerry.

Answer 1

Tom has .absolute adraty mulk an Tem han n cheesr Tem has dompanali ery Lceis hos aduadayik comparati adoaray n Chese e) caress 10 Tom PPFic 24 Malk Tom shousd specializ 4 Sery sho Specializ chasat