Question 1

Harry is a computer company executive, earning $200 per hour managing the company and promoting its products. His daughter Quinn is a high school student, earning $6 per hour helping her grandmother on the farm. Harry's computer is broken. He can repair it himself in one hour. Quinn can repair it in 10 hours. Harry's opportunity cost of repairing the computer is lower than Quinn's.

Accepted Answer

Harry's opportunity cost of repairing the computer is $200 (the amount he earns per hour), whereas Quinn's opportunity cost is $6 (the amount she earns per hour). Since $200 is greater than $6, Harry's opportunity cost is higher than Quinn's.

Question 2

Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

Accepted Answer

Trade allows individuals or countries to specialize in producing and exporting goods or services that they can produce more efficiently or with lower opportunity cost than other countries. This results in overall economic growth as goods and services are produced at lower cost and greater efficiency, benefitting everyone in society.

Question 3

Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, Ellie has a comparative advantage in the production of ice cream.

Accepted Answer

Ellie's opportunity cost of producing one apple pie is higher in terms of ice cream, meaning she has to give up less ice cream to produce apple pies compared to Brendan. This implies Brendan has a comparative advantage in apple pies, and Ellie in ice cream, as comparative advantage is determined by who has the lower opportunity cost in production.

Question 4

In an economy consisting of two people producing two goods, it is possible for one person to have the absolute advantage and the comparative advantage in both goods.

Accepted Answer

While one person can have the absolute advantage in both goods (meaning they can produce more of both goods with the same resources), comparative advantage is about who can produce a good at a lower opportunity cost. If one person has a comparative advantage in one good, the other person must have the comparative advantage in the other good, as comparative advantage is relative.

Question 5

The gains from specialization and trade are based on absolute advantage.

Accepted Answer

The gains from specialization and trade are based on comparative advantage, not absolute advantage. Absolute advantage refers to the ability of a country, individual, or company to produce more of a certain good or service than another country, individual, or company using the same amount of resources. Comparative advantage, on the other hand, refers to the ability of a country to produce a good or service at a lower opportunity cost than another country. The concept of comparative advantage explains why countries benefit from trade even if one country is more efficient at producing all goods.

Question 6

The principle of comparative advantage states that, regardless of the price at which trade takes place, everyone will benefit from trade if they specialize in the production of the good for which they have a comparative advantage.

Accepted Answer

The principle of comparative advantage suggests that countries or individuals will benefit from trade if they specialize in producing goods for which they have a lower opportunity cost, not regardless of the price at which trade takes place. The benefits from trade depend on the relative prices of goods, which should reflect comparative advantages.

Question 7

Fred trades 2 tomatoes to Barney in exchange for 1 pumpkin. Fred and Barney both gain from the exchange. We can conclude that, for Barney, the opportunity cost of producing 1 pumpkin is greater than 2 tomatoes.

Accepted Answer

The statement that both Fred and Barney gain from the exchange does not necessarily imply anything about Barney's opportunity cost of producing 1 pumpkin relative to 2 tomatoes. It only indicates that each values what they receive more than what they give up.

Question 8

Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods.

Accepted Answer

This is because even if one country has an absolute advantage in the production of both goods, there will still be differences in the opportunity costs of producing each good. This leads to comparative advantage and the potential for both countries to benefit from trade.

Question 9

Timmy can edit 2 pages in one minute and he can type 80 words in one minute. Olivia can edit 1 page in one minute and she can type 100 words in one minute. Timmy has an absolute advantage and a comparative advantage in editing, while Olivia has an absolute advantage and a comparative advantage in typing.

Accepted Answer

Timmy can edit more pages per minute than Olivia, giving him an absolute advantage in editing. He also has a comparative advantage in editing because his opportunity cost of editing is lower than Olivia's, meaning he would have to give up less typing to edit a page compared to Olivia. On the other hand, Olivia has an absolute advantage in typing as she can type more words per minute than Timmy. She also has a comparative advantage in typing because her opportunity cost of typing is lower than Timmy's, meaning she would have to give up less editing to type a certain amount of words compared to Timmy.

Question 10

Zora can produce 4 quilts in a week and she can produce 1 corporate website in a week. Lou can produce 9 quilts in a week and he can produce 2 corporate websites in a week. Zora has the comparative advantage in quilts and the absolute advantage in neither good, while Lou has the comparative advantage in corporate websites and the absolute advantage in both goods.

Accepted Answer

Comparative advantage is determined by who has the lower opportunity cost in producing a good, not by who produces more. Zora has the comparative advantage in corporate websites because she gives up fewer quilts to produce a website compared to Lou. Lou has the absolute advantage in both goods because he can produce more of both quilts and websites in a week than Zora.

Question 11

Suppose Hank and Tony can both produce corn. If Hank's opportunity cost of producing a bushel of corn is 2 bushels of soybeans and Tony's opportunity cost of producing a bushel of corn is 3 bushels of soybeans, then Hank has the comparative advantage in the production of corn.

Accepted Answer

Hank has a lower opportunity cost of producing corn (2 bushels of soybeans) compared to Tony (3 bushels of soybeans), which means he has a comparative advantage in the production of corn.

Question 12

If a country has the comparative advantage in producing a product, then that country must also have the absolute advantage in producing that product.

Accepted Answer

Comparative advantage means that a country can produce a good or service at a lower opportunity cost than another country. It does not necessarily mean that the country is the most efficient producer of that good or service, which is what absolute advantage refers to.

Question 13

It takes Anne 3 hours to make a pie and 4 hours to make a shirt. It takes Mary 2 hours to make a pie and 5 hours to make a shirt. Anne should specialize in making shirts and Mary should specialize in making pies, and they should trade.

Accepted Answer

We can calculate Anne's productivity in making a shirt as 1/4 (since she can make 1 shirt in 4 hours) and her productivity in making a pie as 1/3. Similarly, we can calculate Mary's productivity in making a pie as 1/2 and her productivity in making a shirt as 1/5.

Now, we can see that Anne has a comparative advantage in making shirts as her productivity in making a shirt (1/4) is higher than her productivity in making a pie (1/3). Similarly, Mary has a comparative advantage in making pies as her productivity in making a pie (1/2) is higher than her productivity in making a shirt (1/5).

Therefore, Anne should specialize in making shirts and Mary should specialize in making pies, as it will lead to higher total output. They can then trade their products with each other, which will further increase their consumption possibilities.

Question 14

In one month, Moira can knit 2 sweaters or 4 scarves. In one month, Tori can knit 1 sweater or 3 scarves. Together, they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

Accepted Answer

Let's assume that Moira knits x sweaters and Tori knits y scarves in one month. 
According to the given information, 
2x = number of sweaters Moira knits in one month 
4x = number of scarves Moira knits in one month 
y = number of scarves Tori knits in one month 
x = number of sweaters Tori knits in one month

If we add up their output: 
2x + y = total number of sweaters 
4x + 3y = total number of scarves

Now, we want to find out the total output if Moira knits only sweaters (2x) and Tori knits only scarves (3y). Substituting the above equations: 
2x + 3y > 2x + y 
4x + 3y > 4x

So, we can see that the total output will be greater if Moira knits only sweaters and Tori knits only scarves. Hence, the statement is true.

Question 15

If one producer is able to produce a good at a lower opportunity cost than some other producer, then the producer with the lower opportunity cost is said to have an absolute advantage in the production of that good.

Accepted Answer

The producer with the lower opportunity cost is said to have a comparative advantage, not an absolute advantage. Absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Question 16

If one producer has the absolute advantage in the production of all goods, then that same producer will have the comparative advantage in the production of all goods as well.

Accepted Answer

Absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources. Comparative advantage, however, involves producing goods at a lower opportunity cost. It is possible for one producer to have an absolute advantage in all goods but still have a comparative advantage in only some, as comparative advantage is determined by which goods can be produced at the lowest relative opportunity cost, not the highest volume.

Question 17

When there are two people and each is capable of producing two goods, it is possible for one person to have a comparative advantage over the other in both goods.

Accepted Answer

If each person is capable of producing two goods, it is not possible for one person to have a comparative advantage over the other in both goods. Comparative advantage means that one person can produce a good at a lower opportunity cost than the other, which requires differences in their production abilities. If both individuals can produce two goods, they would either have the same opportunity cost for both goods or the same production abilities for both goods, making it impossible for one person to have a comparative advantage over the other in both goods.

Question 18

Unless two people who are producing two goods have exactly the same opportunity costs, then one person will have a comparative advantage in one good, and the other person will have a comparative advantage in the other good.

Accepted Answer

This statement is true according to the principle of comparative advantage in economics. If two individuals have different opportunity costs in producing two goods, then they should specialize in producing the good in which they have a lower opportunity cost and trade with each other to maximize their overall production and consumption.

Question 19

It takes Ross 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Courtney 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Courtney and Ross cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.

Accepted Answer

Courtney has a comparative advantage in washing and polishing cars because she can do it in less time than Ross. Ross, by focusing on producing corn, where their productivity is the same, allows both to benefit from specialization and trade based on Courtney's lower opportunity cost for car washing.

Question 20

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Differences in opportunity cost mean that different individuals or countries have different strengths and weaknesses in producing goods and services. By trading with each other, they can specialize in producing the goods or services in which they have a comparative advantage and engage in mutual gain from trade.

Quiz 3: Interdependence and the Gains From Trade