Comparative Advantage Review Frqs April 2019

AP Economics:

Comparative Advantage Review FRQs April 2019

Comparative Advantage FRQs

OUTPUT PER WORKER PER DAY

Units of opp Units of opp

Country Cloth costs Food costs

Newland 10 .1 1 10

Beeland 10 .5 5 2

1) The table above gives the production alternatives of two nations that are producing cloth and food, using equal amounts of resources.

a) i) Calculate the opportunity cost of producing a unit of cloth in Newland

1/10 unit of food (that/this…output problem)

ii) Calculate the opportunity cost of producing a unit of food in Beeland.

2 units of cloth (that/this…output problem)

b) i) Which nation has the comparative advantage in cloth production?

Newland (has lower opportunity cost)

ii) Which nation has the comparative advantage in food production?

Beeland (has lower opportunity cost)

c) Now assume that the productivity of Beeland’s workers triples for each good.

i) Which country has the comparative advantage in food production?

Beeland

ii) Explain how you determined your answer.

Opportunity cost of producing food has not changed… or… Beeland’s opportunity cost of producing food is 2 units of cloth and Newland’s is 10 units of cloth. Beeland has a lower opportunity cost of producing food and thus a comparative advantage in food production.

2)

Using equal amounts of resources, the countries of Ashna and Luna can each produce

any combination of food and machines described by their production possibilities

curves above. (Useful to set up cost and opportunity cost tables):

food opp cost machines opp cost

Ashna 30 .33 10 3

Luna 40 1 40 1

a) Which country has an absolute advantage in the production of machines? Explain.

Luna. They produce more machines with same amount of resources (40 vs. 10).

b) Which country has an absolute advantage in the production of food? Explain.

Luna. They produce more food with same amount of resources (40 vs. 30)

c) Which country has a comparative advantage in the production of machines? Explain.

Luna. They have lower opportunity cost of producing machines (1 unit of food vs 3 units of food).

d) With trade between these two countries, which country will export food? Explain.

Ashna. They have the lower opportunity cost in producing food (1 machine vs 1/3 machine) and thus the comparative advantage in producing food, so they should specialize in producing food and Luna should produce machines and import food.

e) Give an example of terms of trade acceptable to both countries.

Luna would pay between 1/3 and 1 machine per food and Ashna would

pay between 1 and 3 units of food per machine.

(Any figure between pre-trade opportunity costs is acceptable)

3)

Assume that two countries, Atlantis and Xanadu, have equal amounts of resources.

Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line

MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any

combination, as shown by the line PQ in the figure above.

(Again, useful to set up cost and opportunity cost tables):

cars opp cost tractors opp cost

Atlantis 30 .33 10 3

Xanadu 20 2 40 .5

a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer.

Xanadu. They can produce more tractors with the same resources (40 vs. 10)

b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity cost, explain how you determined your answer.

Atlantis. Their opportunity cost of producing a car is 1/3 tractor, Xanadu’s is 2 tractors.

c) If the two countries specialize and trade with each other, which country will import cars? Explain why?

Xanadu. They have higher opportunity cost of producing cars so should specialize in producing tractors… or …Atlantis has lower opportunity cost of producing cars and should specialize in producing cars… or … it is cheaper for Xanadu to produce tractors and trade for cars than to produce cars.

d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade.

Atlantis can produce 1 car and trade for 1 tractor. Without trade they would give up production of 3 cars to produce 1 tractor. Trade allows Atlantis to consume beyond their PPC.

4) Country X and Country Y are trading partners, and both produce furnaces and solar panels. The countries can produce the following amounts using equal amounts of resources:

Country X: 6 furnaces or 8 solar panels

Country Y: 6 furnaces or 12 solar panels

(useful to set up cost and opportunity cost tables):

furnaces opp cost solar panels opp cost

Country X 6 1.338 .75

Country Y 6 212 .5

a) Which country has an absolute advantage in producing solar panels? Country Y

b) Calculate the opportunity cost of a furnace in Country Y. 2 solar panels

c) Which country has the comparative advantage in producing furnaces? Explain.

Country X has the comparative advantage, because it has lower opportunity costs of producing a furnace. The opportunity cost of producing furnaces for Country X is 1.33 solar panels, while the opportunity cost of producing furnaces for Country Y is 2 solar panels. (notice the opportunity costs for a country are always inverses of each other)

d) If the terms of the trade were that 2 furnaces are exchanged for 1 solar panel, should Country X produce solar panels domestically or import solar panels from Country Y? They would produce solar panels domestically. By producing domestically they incur opportunity costs of .75 furnaces, lower than the 2 furnace cost in the trade terms given.

5) The following table shows the number of donuts or cupcakes that John or Erica can produce in one day.

a) Who has the absolute advantage in producing donuts? Explain.

John, because he can produce 200 donuts using the same resources Erica uses to produce 150.

b) Who has the comparative advantage in producing donuts? Explain.

Erica, because she has a lower opportunity cost for producing donuts, .33 cupcakes vs. .50 cupcakes for John.

c) Assume that John and Erica specialize according to their comparative advantages and that one cupcake is exchanged for four donuts.

1. Indicate whether or not specialization and trade are beneficial to John. Yes– his opportunity cost to producing one cupcake is 2 donuts, but through trade he can receive 4 donuts for each cupcake.
2. Indicate whether or not specialization and trade are beneficial to Erica. No – her opportunity cost to producing one cupcake is 3 donuts, but by trading she would need to pay 4 donuts for each cupcake.

d) Assume that Erica develops a new cupcake production technique that will increase her daily production of cupcakes only. Using donuts on the horizontal axis, draw a correctly labeled production possibilities curve for Erica, before and after the technology change in cupcake production.

Curve shifts outward (upward) along y axis from 50. Curve terminates on x axis at 150