Question 1 Monica and Rachel are flatmates. They spend most of their time working, but they leave some time for their favourite activities: making pizza and fine coffee. Monica takes 5 minutes to make a pot of coffee and 30 minutes to make a pizza. Rachel takes 15 minutes to make a pot of coffee and 60 minutes to make a pizza.
a) Who has the absolute advantage in making pizza? Who has the absolute advantage in making coffee? Explain. b) Who has the comparative advantage in making pizza? Who has the comparative advantage in making coffee? Explain. c) If Rachel and Monica trade foods with each other, who will trade away pizza in exchange for coffee?
Question 2 There are two bakeries in Hobart that sell donuts and coffee: Flour Mill and Hortons. Hortons can produce 50 donuts or roast one kilo of coffee beans in one hour. The flour Mill can produce 40 donuts or roast 2 kilos of coffee beans in one hour.
a) Suppose that the two bakeries decide to specialize and trade with each other to increase output. Which bakery should produce donuts? Which bakery should produce roasted coffee beans? You must provide support for your conclusion. b) Identify the bounds on the terms of trade between the two bakeries. What is the maximum and minimum “price” for donuts and the maximum and minimum “price” for roasted coffee beans?
Question 3 The table below shows the production possibilities of a small Pacific Island economy.
Production Bundle Fish (kilos) Berries (kilos) A 0 20 B 1 18 C 2 15 D 3 11 E 4 6 F 5 0
a) Can this economy produce 2 kilos of fish and 18 kilos of berries? Explain why or why not? b) What is the opportunity cost of increasing the production of fish from 3 kilos to 4 kilos if production is efficient? c) Describe how the opportunity cost of producing fish changes as the quantity of fish produced increases? Provide an explanation for your observation.
Question 4 There are two firms: Macstuff and Winstuff. Each firm can produce either software or hardware using their resources. With one unit of its own resources Macstuff can produce 200 units of hardware or 1000 units of software. With one unit of its own resources Winstuff can produce 100 units of hardware or 1500 units of software. Each firm has 10 units of resources to allocate to the production of software and hardware.
a) Use the information provided above to draw a single graph which shows both firm’s Production Possibility Curves (put software on the y-axis). Compute the slope of each firms’ PPC curve. Be sure to carefully label all parts of the diagram. b) Define comparative advantage and use the graph to help you explain which of the two firms has a comparative advantage in producing hardware. Explain which firm has the comparative advantage in producing software?