Opportunity Cost Exercises by xte63517

VIEWS: 67 PAGES: 15

• pg 1
```									EXERCISE 3.1 (U.S. PPF)
In the United States, producing one unit of cheese requires 1 unit
of labor, while producing one unit of wine requires 2 units of labor.
a.    Construct the U.S. production possibilities frontier for labor
supply L = 100.

b.   Determine the U.S. maximum cheese production.

c.   Determine the U.S. maximum wine production.

d.   Find the U.S. opportunity cost of cheese in terms of wine.
Where does it appear in the equation describing the
production possibilities frontier?

EXERCISE 3.2 (JAPANESE PPF)
In Japan, producing one unit of cheese requires 6 units of labor,
while producing one unit of wine requires 3 units of labor.
a.   Construct Japan’s production possibilities frontier for labor
supply L* = 300.

b.   Determine Japan’s maximum cheese production.
c.   Determine Japan’s maximum wine production.

d.   Find Japan’s opportunity cost of cheese in terms of wine.

e.   Compare the slopes of the U.S. and Japanese PPFs.

EXERCISE 3.3 (WORLD EQUILIBRIUM)
a. Find the relative price of cheese to wine required to have the
United States produce both cheese and wine.

b.   Find the relative price of cheese to wine required to have
Japan produce both cheese and wine.

c.   Find the world relative supply of cheese to wine if both
countries specialize in their comparative advantage good.
d.   Construct world relative supply.

e.   Graph world relative demand for cheese to wine RD = P W /P C.

f.   Find the equilibrium relative price of cheese to wine under

g.   Compare the free trade relative price to each country’s
autarky relative price.

h.   Determine each country’s optimal production bundle under

EXERCISE 3-4a (U.S. TPF)
a. Construct the U.S. trade possibilities frontier.
b.   Determine the U.S. maximum cheese consumption.

c.   Determine the U.S. maximum wine consumption.

d.   Find the slope of the U.S. TPF.

EXERCISE 3-4b (JAPANESE TPF)

e.   Construct Japan’s trade possibilities frontier.

f.   Determine Japan’s maximum cheese consumption.

g.   Determine Japan’s maximum wine consumption.

h.   Find the slope of Japan’s TPF. Compare the slopes of the
U.S. and Japanese TPFs.
EXERCISE 3.1 SOLUTION (U.S. PPF)
In the United States, producing one unit of cheese requires 1 unit
of labor, while producing one unit of wine requires 2 units of labor.
a.   Construct the U.S. production possibilities frontier for labor
supply L = 100.

b.   Determine the U.S. maximum cheese production.

c.   Determine the U.S. maximum wine production.

d.   Find the U.S. opportunity cost of cheese in terms of wine.
Where does it appear in the equation describing the
production possibilities frontier?

It is the absolute value of the slope of the PPF.
EXERCISE 3.2 SOLUTION (JAPANESE PPF)
In Japan, producing one unit of cheese requires 6 units of labor,
while producing one unit of wine requires 3 units of labor.
a.   Construct Japan’s production possibilities frontier for labor
supply L* = 300.

b.   Determine Japan’s maximum cheese production.

c.   Determine Japan’s maximum wine production.

d.   Find Japan’s opportunity cost of cheese in terms of wine.

e.   Compare the slopes of the U.S. and Japanese PPFs.
The Japanese PPF is more steeply downward sloping due to
Japan’s higher opportunity cost of cheese in terms of wine.
EXERCISE 3.3 SOLUTION (WORLD EQUILIBRIUM)
In the United States, producing one unit of cheese requires 1 unit
of labor, while producing one unit of wine requires 2 units of labor.
In Japan, producing one unit of cheese requires 6 units of labor,
while producing one unit of wine requires 3 units of labor. The
U.S. labor supply is 100, while Japan’s labor supply is 300.
a.   Find the relative price of cheese to wine required to have the
United States produce both cheese and wine.

b.   Find the relative price of cheese to wine required to have
Japan produce both cheese and wine.

c.   Find the world relative supply of cheese to wine if both
countries specialize in their comparative advantage good.

d.   Construct world relative supply.
e.   Graph world relative demand for cheese to wine RD = P W /P C.
See table.
P C /P W RD = P W /P C    RS
1/2          2          0 .. 1
1           1            1
2          1/2         1 .. 4

f.   Find the equilibrium relative price of cheese to wine under

g.   Compare the free trade relative price to each country’s
autarky relative price.
The free trade relative price of cheese to wine of 1 is higher
than the U.S. autarky price of 1/2 and lower than Japan’s
autarky price of 2.

h.   Determine each country’s optimal production bundle under
The United States specializes in cheese and Japan
specializes in wine.
EXERCISE 3-4a SOLUTION (U.S. TPF)
In the United States, producing one unit of cheese requires 1 unit
of labor, while producing one unit of wine requires 2 units of labor.
In Japan, producing one unit of cheese requires 6 units of labor,
while producing one unit of wine requires 3 units of labor. The
U.S. labor supply is 100, while Japan’s labor supply is 300. The
world relative price is 1.
a.   Construct the U.S. trade possibilities frontier.

b.   Determine the U.S. maximum cheese consumption.

c.   Determine the U.S. maximum wine consumption.

d.   Find the slope of the U.S. TPF.
The (negative of the) free trade relative price of cheese -1.
EXERCISE 3-4b SOLUTION (JAPAN TPF)
e.   Construct Japan’s trade possibilities frontier.

f.   Determine Japan’s maximum cheese consumption.

g.   Determine Japan’s maximum wine consumption.

h.   Find the slope of Japan’s TPF. Compare the slopes of the
U.S. and Japanese TPFs.
The (negative of the) free trade relative price of cheese -1.

The two slopes are the same as the countries both face the
same free trade relative price of cheese.
Exercise 3.1 US PPF
100

50

0
0              50           100
Cheese (pounds)
Exercise 3.2 Japanese PPF
100

0
0                 50            100
Cheese (pounds)
Exercise 3.3 World RS & RD

RS
2

1
RD
0.5

0
0                    1                     2
Relative Quantity of Cheese to Wine
Exercise 3.4 US TPF
100         TPF

PPF
50

0
0                             100
Cheese (pounds)
Exercise 3.4* Japanese TPF
100

TPF*

PPF*
0
0                 50                  100
Cheese (pounds)

```
To top