ELS Chapter 2: Graphing Exercise Answers

ELS Chapter 2: Graphing Exercise Answers
Exploring how comparative advantage provides the basis, and incentive, for trade
1.	According to the information in the graph, what is the opportunity cost of coffee for Tom and Susan? What is the opportunity cost of nuts for Tom and Susan? How are these calculated?
	Answer. With an hour's worth of labor Tom can produce 50 pounds of coffee beans OR 20 pounds of nuts. Therefore, he can obtain an additional 50 pounds of coffee beans by giving up the production of 20 pounds of nuts. That is, the opportunity cost of producing 50 additional pounds of coffee beans is 20 pounds of nuts, or alternately, the opportunity cost of producing one additional pound of coffee beans is 20/50 pounds ( = 0.4 pounds) of nuts. With an hour's worth of labor Susan can produce 20 pounds of coffee beans OR 60 pounds of nuts. Her opportunity cost of producing 20 additional pounds of coffee beans is 60 pounds of nuts, or alternately, the opportunity cost of producing one additional pound of coffee beans is 60/20 pounds ( = 3 pounds) of nuts. Tom and Susan's opportunity cost of nuts can be calculated similarly: Tom's opportunity cost of producing one additional pound of nuts is 50/20 ( = 2.5) pounds of coffee beans while Susan's opportunity cost is 20/60 ( = 0.333) pounds of coffee beans. (This result can be seen by clicking on the Opportunity Costs button in the applet.)
2.	Who has a comparative advantage in coffee production? Who has a comparative advantage in nut production? Which good should each person specialize in to boost overall production in the economy?
	Answer. Since Tom's opportunity cost of coffee beans is 0.4 pounds of nuts and Susan's opportunity cost of coffee beans is 3 pounds of nuts, Tom has a comparative advantage in coffee production. Tom's opportunity cost of nuts is 2.5 pounds of coffee beans, while Susan's opportunity cost of nuts is 0.333 pounds of coffee, indicating that Susan has a comparative advantage in nut production. Therefore, Tom should specialize completely in coffee production, while Susan should specialize completely in nut production.
3.	Initially, each person spends half the day picking coffee and half the day picking nuts. What happens to total production of coffee and nuts in this economy if each person spends the entire day producing the good that he/she has a comparative advantage in? To see the effects of this reallocation of labor hours, change the Coffee Labor Hours values for Tom and Susan in the table above (the Nuts Labor Hours value will change automatically) and see what happens to New Production. What happens to overall production in this economy?
	Answer. Initially, Tom produced 200 pounds of coffee and 80 pounds of nuts while Susan produced 80 pounds of coffee and 240 pounds of nuts; total production was 280 pounds of coffee and 320 pounds of nuts. After specialization, Tom produces 400 pounds of nuts (and 0 pounds of nuts), while Susan produces 480 pounds of nuts (and 0 pounds of coffee). Total production has thus risen to 480 pounds of nuts and 400 pounds of coffee.
4.	From the response to question 3, what do you conclude about the benefits of specialization?
	Answer. Through specialization, total output in the economy has risen and Tom and Susan are now operating on the economy's production possibility frontier.
1.	Now let's assume that Susan and Tom get trained in new picking techniques that allow them to dramatically increase their overall picking productivity for coffee while having no impact on their ability to pick nuts. To illustrate this, increase each of the coffee productivity numbers in the table by 10% (i.e. Tom's coffee production rises to 55 pounds per hour and Susan's coffee production rises to 22 pounds per hour while nut production per hour stays at the original levels). What happens to the individual production possibility curves?
	Answer. Both the individual production possibility curves shift outward and total production increases. Watch the coffee intercept as you change the figures. For Tom it rises from 400 to 440 and for Susan it rises from 160 to 176. An increase in productivity shifts out the PPC of a country, meaning that more output can be produced with the same level of inputs.
2.	After the increase in economy-wide productivity, who has a comparative advantage in coffee production?
	Answer. Tom still has a comparative advantage in the production of coffee The opportunity costs of nuts and coffee for both Tom and Susan have changed due to the increase in productivity that affected the production of only one good. Now the opportunity cost of a pound of coffee for Tom is 0.36 pounds of nuts while for Susan it is 2.73 pounds of nuts. Likewise, the opportunity cost of a pound of nuts for Tom is now 2.75 pounds of coffee and for Susan it is 0.37 pounds of coffee.
3.	Who has a comparative advantage in nut production?
	Answer. Susan still has a comparative advantage in the production of nuts. The opportunity costs of nuts and coffee for both Tom and Susan have changed due to the increase in productivity that affected the production of only one good. Now the opportunity cost of a pound of coffee for Tom is 0.36 pounds of nuts while for Susan it is 2.73 pounds of nuts. Likewise, the opportunity cost of a pound of nuts for Tom is now 2.75 pounds of coffee and for Susan it is 0.37 pounds of coffee.
4.	Which good should each person specialize in?
	Answer. Tom should still specialize completely in coffee production, while Susan should specialize completely in nut production. (Click the Opportunity Cost button to see these figures.)
5.	What happens to overall production in the economy after specialization?What happens to overall production in the economy after specialization?
	Answer. After specialization, total output rises from 480 pounds of nuts and 400 pounds of coffee beans to 480 pounds of nuts (no change) and 440 pounds of coffee (up 10%).