Question 1

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 compare the productivity of each person when they specialize in one type of item:
- In one month, Moira can knit 2 sweaters. 
- In one month, Tori can knit 3 scarves.

This means that together, they can create a total of 5 items in one month (2 sweaters + 3 scarves = 5 items).

Now let's compare their productivity if they each knit one of the items:
- In one month, Moira can knit 2 sweaters. 
- In one month, Tori can knit 4 scarves.

This means that together, they can create a total of 6 items in one month (2 sweaters + 4 scarves = 6 items).

Therefore, if Moira knits only sweaters and Tori knits only scarves, they could produce more output in total (6 items) compared to if they both knit a mix of sweaters and scarves (5 items).

Question 2

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 in one minute than Olivia, which gives him an absolute advantage in editing. He also has a lower opportunity cost of editing since he only gives up the ability to type 40 words (2 pages x 20 words per page) in one minute to edit one page, while Olivia gives up the ability to type 100 words to edit one page. Therefore, Timmy has a comparative advantage in editing. On the other hand, Olivia can type more words in one minute than Timmy, giving her an absolute advantage in typing. She also has a lower opportunity cost of typing since she only gives up the ability to edit 1/2 page (20 words per page/100 words per minute) to type 100 words in one minute, while Timmy gives up the ability to edit 40 words to type 80 words in one minute. Therefore, Olivia has a comparative advantage in typing.

Question 3

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

According to the principle of comparative advantage, each person should specialize in producing the good in which they have a lower opportunity cost, meaning the good they give up less of to produce one unit of the other good. If one person has a comparative advantage in one good, the other person must have a comparative advantage in the other good. Therefore, it is not possible for one person to have a comparative advantage in both goods.

Question 4

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 refers to a country's ability to produce a good or service at a lower opportunity cost than another country, while absolute advantage refers to a country's ability to produce more of a good or service with the same amount of resources compared to another country. Therefore, a country can have a comparative advantage in producing a product without having an absolute advantage in producing it.

Question 5

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 6

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 7

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 8

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

While both Ross and Courtney take 6 hours to produce 1 bushel of corn, they still have a comparative advantage in different tasks. Ross can wash and polish a car in 2 hours, which means he has a lower opportunity cost of producing corn than Courtney, who takes 1 hour to wash and polish a car. Therefore, Ross could specialize in washing and polishing cars while Courtney specializes in producing corn, allowing them both to benefit from trade.

Question 9

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 10

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

Anne has a comparative advantage in making shirts because she can produce 1/4 of a shirt in an hour (4 hours per shirt) whereas Mary can produce 1/5 of a shirt in an hour (5 hours per shirt). Mary has a comparative advantage in making pies because she can produce 1/2 of a pie in an hour (2 hours per pie) whereas Anne can produce 1/3 of a pie in an hour (3 hours per pie). Therefore, it makes sense for Anne to specialize in making shirts and for Mary to specialize in making pies. They should then trade with each other to maximize their production and consumption possibilities.

Question 11

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

Accepted Answer

When people specialize in activities that they are comparatively good at, it leads to higher efficiency, increased productivity, and lower costs, making goods and services more affordable and accessible to everyone. This, in turn, boosts economic growth and generates more job opportunities. Therefore, trade can be beneficial for everyone in society.

Question 12

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 is the principle of comparative advantage. If two people have different opportunity costs for the production of two goods, then they should specialize in producing the good for which they have a lower opportunity cost and trade with the other person, who has a comparative advantage in producing the other good.

Question 13

Differences in opportunity cost allow for gains from trade.

Accepted Answer

Opportunity cost is the cost of the next best alternative foregone. When two individuals or countries have different opportunity costs for producing a certain good, they can benefit from trade by specializing in the production of the good in which they have a comparative advantage (lower opportunity cost) and then trading it for the good in which the other party has a comparative advantage. This results in both parties being able to obtain more of both goods than they would be able to produce on their own. Therefore, differences in opportunity cost allow for gains from trade.

Question 14

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 15

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 16

As long as two people have different opportunity costs, each can gain from trade with the other, since trade allows each person to obtain a good at a price lower than his or her opportunity cost.

Accepted Answer

This statement is true according to the economic principle of comparative advantage. If two people have different opportunity costs, they can specialize in producing the good that has a lower opportunity cost for them and trade with the other person who has a higher opportunity cost for that good. This results in both individuals being able to obtain the good at a lower price than their respective opportunity costs for producing it themselves.

Question 17

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 18

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's opportunity cost of producing a bushel of corn is lower than Tony's, meaning he gives up fewer soybeans to produce it. This means that Hank has a lower opportunity cost of producing corn, giving him the comparative advantage in the production of corn.

Question 19

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 each country can specialize in producing the good they have a comparative advantage in, meaning the opportunity cost of producing one good is lower for one country than the other. By trading with each other, both countries can benefit from consuming more of both goods than they could have by producing them domestically without trade.

Question 20

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. Comparative advantage refers to a country's ability to produce a specific good or service at a lower opportunity cost than another country, while absolute advantage refers to a country's ability to produce more of a good or service than another country using the same amount of resources.

Quiz 3: Interdependence and the Gains From Trade