EOC2: End of Chapter Problems - Ch. 2: The Power of Trade and Comparative Advantage

Use the idea of the "division of knowledge" to answer the following questions.

a. Which country has more knowledge: Utopia, where in the words of Karl Marx, each person knows just enough about hunting, fishing, and cattle raising to "hunt in the morning, fish in the afternoon, [and] rear cattle in the evening," or Drudgia, where one‑third of the population learns only about hunting, one‑third only about fishing, and one‑third only about cattle raising?

There is more knowledge in

b. Which planet has more knowledge: Xeroxia, each of whose 1 million inhabitants knows the same list of 1 million facts, or Differentia, whose 1 million inhabitants each know a different set of 1 million facts? How many facts are known on Xeroxia? How many facts are known on Differentia?

There is more knowledge on __________. On Xeroxia, there is a total of __________

facts known, whereas on Differentia, there is a total of ________

a. Drudgia

b. Differentia; one million; one trillion

In The Wealth of Nations, Adam Smith said that one reason specialization makes someone more productive is that "a man commonly saunters a little in turning his hand from one sort of employment to another." How can you use this observation to improve your pattern of studying for your four or five college courses this semester?

Spending a __________ time on one subject before moving on to the next is a __________ strategy to maximize the benefits of the time spent studying.

longer; good

"Opportunity cost" is one of the tougher ideas in economics. Let's make it easier by starting with some simple examples. In the following examples, find the opportunity cost: Your answer should be a rate, as in "1.5 widgets per year" or "6 lectures per month." Assume that these relationships are simple linear ones, so that if you put in twice the time you get twice the output, and half the time yields half the output.

a. Erin has a choice between two activities: She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one transmission?

Each transmission costs __________ fuel injector(s) per hour.

b. Katie works at a customer service center and every hour she has a choice between two activities: answering 200 telephone calls per hour or responding to 400 emails per hour. What is the opportunity cost of responding to 400 phone calls?

400 phone c

a. 2

b. 800

c. 2.5

a. American workers are commonly paid much more than Chinese workers.

True or false: This is largely because American workers are typically more productive than Chinese workers.

b. Julia Child, an American chef (and World War II spy) who reintroduced French cooking to Americans in the 1960s, was paid much more than most American chefs.

True or false: This was largely because Julia Child was much more productive than most American chefs.

a. True

b. True

According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high‑tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here.

a. Consider the productivity table. Which region has an absolute advantage at making high‑quality cars? And low‑quality cars?

The has an absolute advantage in high‑quality cars. The has an absolute advantage in low‑quality cars.

b. Using the information in the productivity table, estimate the opportunity cost of making high‑ or low‑quality cars in the North and in the South. Which region has a comparative advantage, i.e., lowest opportu

a. North; North

b. North; South

According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high‑tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here.

One million hours of labor are available for making cars in the North, and another 1 million hours of labor are available for making cars in the South.

In a no‑trade world, let's assume that two‑thirds of the auto industry labor in each region is used to make high‑quality cars and one‑third is used to make low‑quality cars. Solve for how many of each kind of car will be produced in North and South, and add up to determine total global outp

Output of high‑quality cars in the

North: 22,222

South: 11,111

Output of low‑quality cars in the

North: 16,666

South: 11,111

Global ouput

High‑quality cars: 33,333

Low‑quality cars: 27,778

According to the Wall Street Journal (August 30, 2007, "In the Balance"), it takes about 30 hours to assemble a vehicle in the United States. Let's use that fact plus a few invented numbers to sum up the global division of labor in auto manufacturing. In international economics, "North" is shorthand for the high‑tech developed countries of East Asia, North America, and Western Europe, while "South" is shorthand for the rest of the world. Let's use that shorthand here.

One million hours of labor are available for making cars in the North, and another 1 million hours of labor are available for making cars in the South.

If each region completely specializes in the type of car in which it holds the comparative advantage, what will global output of high‑quality cars be? Of low‑quality cars? Is global output in each kind of car higher than before? (We'll solve a problem with the final step of trade in the Thinking

Output of high‑quality cars in the

North: 33,333

South: 0

Output of low‑quality cars in the

North: 0

South: 33,333

Global output

High‑quality cars: 33,333

Low‑quality cars: 33,333

It has been reported that John Lennon was once asked whether Ringo Starr was the best drummer in the world, and he quipped, "He's not even the best drummer in the Beatles!" (Paul McCartney also drummed on some of the White Album.) Assuming that this story is true and that Lennon was correct, explain, using economics, why it could still make sense to have Ringo on drums.

John's quote suggests that Paul had __________ advantage playing the drums but Ringo had __________ advantage playing the drums.

an absolute; a comparative

Categorize each of the following examples into one of these reasons for trade: division of knowledge or comparative advantage.

a. Two recently abandoned cats, Bingo and Tuppy, need to quickly learn how to catch mice in order to survive. If they also remain well groomed, they stand a better chance of surviving, because good grooming reduces the risk of disease and parasites. Each cat could go it alone, focusing almost exclusively on learning to catch mice. The alternative would be for Bingo to specialize in learning how to groom well and for Tuppy to specialize in learning how to catch mice well.

Bingo and Tuppy will trade because of __________.

b. Supreme Court Chief Justice John Roberts hires attorneys who are less skilled than himself to do routine legal work.

Justice Roberts hires less‑skilled lawyers because of _________.

a. division of knowledge.

b. comparative advantage.

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage?

In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen.

Kana's opportunity cost of a batch of soup is __________. Kana's opportunity cost of a clean kitchen is __________. Mitchell's opportunity cost of a batch of soup is __________. Mitchell's opportunity cost of a clean kitchen is __________.

_________ has absolute advantage in making soup. _________ has absolute advantage in cleaning kitchens.

__________ has comparative advantage in making soup. __________ h

one clean kitchen,

one batch of soup,

one-fourth of a clean kitchen,

four batches of soup,

Mitchell,

Kana,

Mitchell,

Kana

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage?

In one hour, Ethan can bake 20 cookies or hang the drywall for two rooms. In one hour, Sienna can bake 100 cookies or hang the drywall for three rooms.

Ethan's opportunity cost of a batch of 20 cookies is __________. Ethan's opportunity cost of drywalling two rooms is ___________. Sienna's opportunity cost of a batch of 100 cookies is __________. Sienna's opportunity cost of drywalling three rooms is __________.

__________ has absolute advantage in baking cookies. __________ has absolute advantage in drywalling. __________ has comparative advantage in baking cookies.has co

two drywalled rooms,

20 cookies,

3 drywalled rooms,

100 cookies.

Sienna,

Sienna,

Sienna,

Ethan

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage?

Kara can build two glass sculptures per day or she can design two full‑page newspaper advertisements per day. Sara can build one glass sculpture per day or design four full‑page newspaper ads per day.

Kara's opportunity cost of two sculptures is __________. Kara's opportunity cost of two ads is __________. Sara's opportunity cost of a sculpture is __________. Sara's opportunity cost of four newspaper ads is __________.

__________ has absolute advantage in sculpting. __________ has absolute advantage in designing ads. __________ has comparative advantage in sculpting. __

two newspaper ads,

two sculptures,

four ads,

one sculpture.

Kara,

Sara,

Kara,

Sara

Nobel laureate Paul Samuelson said that comparative advantage is one of the few ideas in economics that is both "true and not obvious." Since it's not obvious, we should practice with it a bit. In each of the cases, determine the opportunity cost of each worker. Who has the absolute advantage at each task, and who has the comparative advantage?

Omar can write 12 excellent poems per day or solve 100 difficult physics problems per day. Riker can write one excellent poem per day or solve 0.5 difficult physics problems per day.

Omar's opportunity cost of a dozen poems is __________. Omar's opportunity cost of 100 physics problems is __________. Riker's opportunity cost of a poem is __________. Riker's opportunity cost of 0.5 physics problems is __________.

__________ has absolute advantage in writing poems. _________ has absolute advantage in solving physics problems. __________ has comparative advantage in writing p

100 physics problems,

12 poems,

0.5 physics problems,

one poem.

Omar,

Omar,

Riker,

Omar

The federal education reform law known as No Child Left Behind requires every state to create standardized tests that measure whether students have mastered key subjects. The same test is given to all students in the same grade in the state. This encourages all schools within a state to cover the same material. According to the division of knowledge model, what are the costs of this approach?

This is a costly strategy because it results in __________ rather than __________. If each of a million students knows the same set of facts, it is as if there.___________________

duplication

specialization

is really only one brain being used.

In this chapter, we've often emphasized how specialization and exchange can create more output. But sometimes the output from voluntary exchange is difficult to measure and doesn't show up in GDP statistics. In each of the following cases, explain how the two parties involved might be able to make themselves both better off just by making a voluntary exchange.

a. Dana received two copies of Gears of War as birthday gifts. Evan received two copies of Halo Infinite as birthday gifts.

Dana could give one copy of __________ to Evan, who could offer one of his copies of __________ to Dana.

b. Jeb, who lives in Florida, has a free subscription to Field and Stream but isn't interested in hunting. George, an outdoorsman, has a free subscription to the Miami Herald but isn't all that interested in Florida news.

They could _____________________________ and both be better off, especially if both men have the last name Bush. A

a. Gears; Halo

b. swap free subscriptions

c. offer love to each other

Many people talk about manufacturing jobs leaving the United States and going to other places, like China. Why isn't it possible for all jobs to leave the United States and go overseas (as some people fear)?

This is not possible because every nation has to have __________ advantage in something. The greater China's __________ advantage in __________, for example, the greater the United States' __________ advantage must be in __________. The more that firms want to locate manufacturing processes in countries like China, the more that those countries would give up. That is, the higher the __________ if they pursued other __________ activities. Even if it were cheaper to produce everything in China—thus giving China something like __________ advantage in all production — trade is based on __________ advantage, not _________ advantage.

a comparative,

comparative,

manufacturing,

comparative,

some other type of production,

opportunity cost,

nonmanufacturing,

an absolute,

comparative,

absolute

Suppose the following table shows the number of labor hours needed to produce airplanes and automobiles in the United States and South Korea, but one of the numbers is unknown.

a. Without knowing the number of labor hours required to produce an auto in South Korea, you can't figure out which country has the comparative advantage in which good. Can you give an example of a number for the empty cell of the table that would give the United States the comparative advantage in the production of airplanes? What about South Korea?

Round all answers to no more than one decimal place.

Enter a number that would give comparative advantage to

the U.S.: _____ hours

South Korea: _____ hours

b. Who has the absolute advantage in the production of airplanes? What about autos?

Absolute advantage in airplanes: ____________

Absolute advantage in autos: _____________

c. What exact number would you have to place in the empty cell o

a. 2; 200

b. United States; Cannot be determined

c. 12.5

In the chapter, you saw how to create a production possibilities frontier for the United States and Mexico. Let's take a look at how to combine these PPFs to make one PPF for the U.S.-Mexico trade alliance.

b. Starting at point A, if citizens of the United States or Mexico decided they wanted more shirts, where would those shirts be produced? Why?

The shirts would be made in

c. Starting at point Z, if citizens of the United States or Mexico decided they wanted more computers, where would those computers be produced? Why?

The computers would be made in

f. What will happen to the PPF as more and more countries join the trade alliance? What would it look like with an infinite number of countries?

With more countries the PPF becomes

b. Mexico because each shirt has an opportunity cost of 1616 computer.

c. the United States because each computer has an opportunity cost of one shirt.

f. smoother and more concave, or bowed out.

In the computers and shirts example from the chapter, the United States traded one computer to Mexico in exchange for three shirts. This is not just an arbitrary ratio of shirts to computers, however. Let's explore the terms of trade a little bit more.

a. Why is trading away a computer for three shirts a good trade for the United States? Why is it also a good deal for Mexico?

If the United States 'traded' one computer domestically by shifting resources into shirt production, there would be __________ available as a result. If Mexico 'traded' three shirts domestically by reallocating resources, it would get __________ computers as a result.

b. What if, instead, the agreed‑upon terms of trade were one computer for eight shirts. Would this trade still benefit both the United States and Mexico?

It would benefit _______________________________.

c. What is the maximum (and minimum) number of shirts that a computer

a. one more shirt; one‑half more

b. the United States.

c. minimum; one shirt; maximum; six shirts.