Practice Questions 2 - Answers
Fall 2003
Econ 101

1. A country's consumption possibilities frontier can be outside its production possibilities frontier if
a. additional resources become available.
b. there is an increase in the level of technology.
c. the country engages in trade.
d. All of the above.
e. Both a and b are correct.
Answer: c, the country engages in trade. In a and b PPF will shift outward but still a point outside PPF will be unattainable.

2. Country A and country B produce wine (w) and cloth (c). The production possibility frontier for A and B can be represented by the following equations:
A: 2w + 3c = 12
B: w + c = 5
a) Using two separate graphs, draw the PPF for both countries by plotting wine (w) on x-axis and cloth (c) on y-axis.
Answer:
  
b) Consider the following combonations: 
(i)   3 units of wine and 2 units of cloth,
(ii)  1 units of wine and 4 unit of cloth,
(iii) 2 units of wine and 2 unit of cloth.
Fill in the following grid for each of the above combinations.
Combi-nations	Country A	Country B	
	Attainable	Unattainable	Efficient	Inefficient	Attainable	Unattainable	Efficient	Inefficient	
(i)	Yes	No	Yes	No	Yes	No	Yes	No	
(ii)	No	Yes	-	-	Yes	No	Yes	No	
(iii)	Yes	No	No	Yes	Yes	No	No	Yes	

c) What is the opportunity cost of wine in country A? What is the opportunity cost of wine in country B?
Answer: 2/3units of cloth in country A and 1unit of cloth in country B.
d) Who has the comparative advantage in cloth? Who has the comparative advantage in cloth wine?
Answer: Country B has comparative advantage in cloth while country A has the comparative advantage in wine.
e) Can there be gains from trade?
Answer: Both countries can gain from trade.
f) If both countries specialize in the production of the item they are good at, what is the maximum amount of wine and cloth that can be produced?
Answer: Country A will produce 6 units of wine and country B will produce 5 units of cloth.

3. Ron and Jon are planning a party. They have one hour to prepare for the party. Ron can make snacks at a rate of 3 snacks per 15 minutes, while Jon makes snacks at 4 per 15 minutes. Ron can make party drinks at a rate of 5 per 15 minutes, while Jon makes drinks at a rate of 8 per 15 minutes.
a) Using two separate graphs, draw the PPF for Ron and Jon placing snacks on the vertical axis and drinks on the horizontal axis.
Answer: 
	In 1 hour total production of	
	Snacks	Drinks	
Ron	12	20	
Jon	16	32	
Use the above points to draw PPF for Ron and Jon.

b) What is the opportunity cost of a drink for Ron? What is the opportunity cost of a drink for Jon?
Answer: Opportunity cost of a drink for Ron = 12/20 = 3/5 of a snack.
              Opportunity cost of a drink for Jon = 16/32 = 1/2 of a snack.
c) Explain who has the absolute and comparative advantage in the production of drinks and snacks. 
Answer: Clearly, from a, Jon has absolute advantage in both snacks and drinks. From b, the opportunity cost of a drink for Jon is less then the opportunity cost of a drink for Ron. So, Jon has the comparative advantage in drink and since the opportunity cost of a snack is opposite of that of a drink, Ron has the comparative advantage in snacks.
d) Can Ron and Jon make 16 drinks and 20 snacks in an hour? If they make 16 drinks and 20 snacks in an hour what combinations of drinks and snacks will each of them produce? Identify the solution on the graph as well as explaining in words. 
Answer: there is more than one way this can be done.  One is the following: Jon makes 16 drinks and 4 snacks (note this is not efficient) and Ron can make 12 snacks.  This is 16 drinks and 20 snacks. 
e) Show how your graph will change if Ron takes a bartending class and learns to make drinks twice as fast has he could before taking the class.
Answer: This is easy, now Ron can make 40 drinks in 1 hour and everything else remains the same.
f) What will the new opportunity cost of a drink be for Ron?
Answer: Opportunity cost of a drink for Ron = 12/40 = 3/10 of a snack.
g) Now who has the absolute and comparative advantage in the production of drinks and snacks? 
Answer: Clearly, Ron has the absolute and comparative advantage in drink and Jon has the absolute and comparative advantage in snack.
h) If Ron and Jon specialize after Ron’s course, how many drinks and snacks can be made in an hour?
Answer: If each specializes,
                  Ron will make = 40 drinks
               Jon will make = 16 snacks.
i)  Show how the solution to part (h) is preferable to a solution where they each spend half of their time on each activity.
Answer: If they spend half their time on each activity,
 Ron will make 6 snacks and 20 drinks.
 Jon will make 8 snacks and 16 drinks.
    So, in total 14 snacks and 36 drinks, less of both goods then in h and hence solution in h is preferable.

4. Fireland and Redland are two small islands producing wheat and cotton. Both of them have 120 labor hours. The following table shows hours needed to produce one bushel of wheat and cotton:

	Labor hours needed to produce 1 bushel of	
	Wheat	Cotton	
Fireland	12	3	
Redland	24	4	

a) Using two separate graphs, draw the PPF for Fireland and Redland placing cotton on the vertical axis and wheat on the horizontal axis.
Answer:
	Total amount produced in 120 hours	
	Wheat	Cotton	
Fireland	10	40	
Redland	5	30	
Use these points to draw PPF for both countries.

b) What is the opportunity cost of 1 bushel of wheat for Fireland? What is the opportunity cost of 1 bushel of wheat for Redland?
Answer: Opportunity cost of a bushel of wheat for Fireland = 40/10 = 4 bushels of cotton.
          Opportunity cost of a bushel of wheat for Redland = 30/5 = 6 bushels of cotton
c) What is the opportunity cost of 1 bushel of cotton for Fireland? What is the opportunity cost of 1 bushel of cotton for Redland?
Answer: Simple, inverse of values in b.
                Opportunity cost of a bushel of cotton for Fireland = 10/40 =1/ 4 bushels of wheat.
  Opportunity cost of a bushel of cotton for Redland = 5/30 = 1/6 bushels of wheat.
d) Who has the absolute advantage in the production of wheat? Who has the absolute advantage in the production of cotton?
Answer: Fireland has the absolute advantage in the production of both wheat and cotton.
e) Who has the comparative advantage in the production of wheat? Who has the comparative advantage in the production of cotton?
Answer: Fireland has the comparative advantage in the production of wheat while Redland has the comparative advantage in the production of cotton.
f) Can Fireland benefit from trade? Explain your answer.
Answer: As long as they have different opportunity cost both will benefit from trade.

5. We have the following data on the production of bread and cookies by Dolly and Molly:
Dolly can make 5 loaves of bread and no cookies in 1hr and 6 loaves of bread and 2 dozen cookies in 2hrs. Molly can make 9 loaves of bread and 3 dozen cookies in 3hrs and 2 loaves of bread and 6 dozen cookies in 2 hrs. Both have 4hrs of time available.
a) On two separate graphs, draw Molly and Dolly’s PPFs placing loaves of bread on x-axis and dozens cookies on the y-axis. (Hint: You will need to convert the data you are given into production combination possible using the entire 4 hrs.)
Answer:
	Total amount produced in 4 hours	
	Dolly	Molly	
Bread	20	12	12	4	
Cookies	0	4	4	12	
Now for both Dolly and Molly we have two points each on the PPF and since PPF is linear we can draw PPF using this data.

b) Who has the absolute advantage in the production of bread? Who has the absolute advantage in the production of cookies?
Answer: Dolly has the absolute advantage in the production of bread while Molly has the absolute advantage in the production of cookies.
c) Who has the comparative advantage in the production of bread? Who has the comparative advantage in the production of cookies?
Answer: Dolly has the comparative advantage in the production of bread. Molly has the comparative advantage in the production of cookies.