elm #4 comparative advantage

The AbiliTy To Produce AT

The lowesT oPPorTuniTy cosT

Comparative advantage:

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TEACHER’S GUIDEP. 101 DefinedP. 104 Content standardsP. 104 MaterialsP. 105 ProcedureP. 106 Lesson outlineP. 111 ClosureP. 111 AssessmentP. 115 OverheadsP. 129 2Answer key

VISUAlS NVisuals for overhead projector.Copy to transparent paper for overhead.

P. 116 NVisual-1: Absolute advantageP. 117 NVisual-2: Comparative advantageP. 118 NVisual-3: Comparative advantageP. 119 NVisual-4: Montana bananas

lESSonS 2Copy and handout to students.

P. 122 2Lesson-I: Montana bananas P. 125 2Lesson-II: Lawn careP. 127 2Lesson assessment

comPArATive AdvAnTAge

The abiliTy To produce aT

The lowesT opporTuniTy cosT

Module-4Teacher

Copyright © 2008 by MCEE (www.EConEdMontana.org) EConoMiCs: thE study of ChoiCEs

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DEFInED

Recall the definition of opportunity cost (see Module-2). Opportunity cost is the value of the next best alternative given up. Opportunity

cost helps to determine who produces what. comparative advantage is the ability to produce at the lowest opportunity cost.

By producing where costs are lowest, we have more resources available to put into the production of other goods and services. Why are bananas not produced in Montana? Climate may be a factor, but hot houses could be built to ensure suitable banana tree habitat.There is a cost to building banana hot houses. The cost is not only the dollar expense of building the houses but also the opportunity cost, the value of the next best alternative foregone. Montana weather is conducive to growing wheat, not bananas. And indeed, Montana has a lower opportunity cost to grow wheat than bananas. Montana has a comparative advantage in growing wheat, South America has a comparative advantage in growing bananas.

Refer to Module-3 2Lesson-I, p 8: Vegetables for beef. Veggie lovin’ Val can produce 500 bushels of vegetables on her ten acre plot. Meat eatin’ Max can produce only 250 bushels of vegetables on his land. Because Val can produce more bushels of vegetables than Max, Val has the absolute advantage producing vegetables. The absolute advantage is the ability to produce more of a good than potential trading partners given a specified set of resources. Max can produce 25 cows to Val’s ten cows given the ten acre plots. It is then also true that Max has the absolute advantage in producing cows.

comparative advantage is the ability to produce at the lowest opportunity cost. Recall, Val’s opportunity cost to produce vegetables is 1/50th of a cow. That is, Val must give up 1/50th of a cow for each bushel of vegetables she produces. Max, on the other hand, must give up 1/10th of a cow for each bushel of vegetables produced. Comparing the relative price, 1/50th of a cow to 1/10th of a cow, Max’s opportunity cost to produce vegetables is higher. Val has a comparative advantage, a lower opportunity cost in producing vegetables.

It is also true that Max has a comparative advantage in producing cows. It costs Max ten bushels of vegetables to produce a cow while it costs Val 50 bushels of vegetables to produce a cow. Max’s opportunity cost of raising cows is lower than Val’s.

Let’s look at this from a less intuitive direction. Assume Val sells her land to farmer Fae. Like Val, Fae can grow 500 bushels of vegetables




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on her ten acre plot. But Fae is better at producing cattle. In fact, Fae can raise as many as 35 cattle on her ten acre plot. The production possibilities frontier for Fae follows.

Farmer Fae has an absolute advantage over Max in both vegetable and cow production. Fae can produce more bushels of vegetables than Max with the given set of resources. Fae can also produce more cows than Max with the given set of resources. But Fae does not have a comparative advantage in both vegetables and cows. Fae does have a comparative advantage over Max for vegetables. It still costs Max 1/10th of a cow to produce one bushel of vegetables and it costs Fae just over 1/14th of a cow. Fae has a lower opportunity cost of producing vegetables, and hence a comparative advantage in vegetable production. However, Max has a lower opportunity cost of producing cows. It still costs him ten bushels of vegetables to produce one cow. In contrast, Fae must give up just over 14 bushels of vegetables to produce one cow. Hence, even though Fae has an absolute advantage in producing cows (she can produce more with the given resources),




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Max has the comparative advantage. Each of these farmers can benefit by producing the good where he

or she has the comparative advantage and then trading with the other farmer for the other good. As shown in the production possibilities frontier for farmer Fae and Max.

Here is another way to think about comparative advantage. Imagine you are a tutor that can earn $30 per hour when working with students. To be a good tutor, you must also keep student records. You are a good record keeper and can type and file ten records per hour but you do not get paid for the time it takes you to keep the records. Because you have enough students to fill all working hours, you are thinking about hiring a record keeper. You have a candidate to fill the position that can type and file five records per hour for an hourly wage of ten dollars. You must decide whether to fill the position or continue to file the records yourself.

Determining who has the comparative advantage will help you make a wise choice. You can file records faster than the potential candidate (ten per hour compared to the record keepers five). But the potential record keeper has a lower opportunity cost for record keeping. While it costs you $30 to file ten records (ten records in one hour with an opportunity cost of $30 per hour), it costs only $20 for the record keeper to file ten records (five records per hour at ten dollars per hour). The record keeper has a comparative advantage in keeping records. It benefits you to hire the record keeper. You can earn more tutoring ($30) and paying the record keeper $20 for ten records leaving a net return of ten dollars more than if you did the records yourself.

Productivity is greatest when production is done by those with the lowest opportunity costs. They have a comparative advantage in producing that good. Wealth is created when we specialize in what we are good at and trade for everything else. specialization allows individuals and communities to expand consumption possibilities by producing what they are good at and trading for things that are more costly for them to produce on their own.

ConCEPTS1. Absolute advantage2. Comparative advantage3. Specialization




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oBJECTIVES1. Understand the concept of absolute advantage.2. Identify who has the comparative advantage.3. Understand the difference between absolute and comparative

advantage.4. Realize that specialization can further enhance the benefits

from trade.

ConTEnT STAnDARDS

national ContEnt standards in EConoMiCs

1. (Standard-2) Effective decision making requires comparing the additional costs of alternatives with the additional benefits.

2. (Standard-5) Voluntary exchange occurs only when all participat-ing parties expect to gain.

3. (Standard 6) When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption, increase.

Montana soCial studiEs ContEnt (standard-5)

1. (Benchmark-1) Identify and explain basic economic concepts.2. (Benchmark-4) Describe how personal economic decisions affect

the lives of people.3. (Benchmark-6) Explain and evaluate the effects of global economic

interdependence.

TIME REQUIRED2-3 class periods

MATERIAlSOverhead projectorTransparency penVisuals for overhead projector: Copy to transparency.NVisual-1: Absolute advantage




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NVisual-2: Comparative advantageNVisual-3: Comparative advantageNVisual-4: Montana bananasLesson worksheets: Copy for each student.2Lesson-I: Montana bananas 2Lesson-II: Lawn care2Lesson assessment

PRoCEDURE1. Explain to students the idea of absolute advantage. Absolute

advantage occurs when one entity can produce more of a commodity than another with a given set of inputs. Display NVisual-1: Absolute advantage. Examining the production possibilities frontier for Val and Max, have students determine who has the absolute advantage to produce vegetables (Val) and who has the absolute advantage to produce cows (Max).

2. Introduce the concept of comparative advantage; the ability to produce at the lowest opportunity cost. Display NVisual-2: Comparative advantage. Remind students that opportunity cost is the value of the next best alternative given up. Explain to students that by producing where costs are lowest, we have more resources available to put into the production of other goods and services. Individual wealth can be increased by specializing where we have a comparative advantage.

3. Discuss with students the concept of income. Income is the inflow of receipts in a given time. By allowing for trade we can expand our income. In the example of Val and Max, we can consume more goods with trade, hence have increased our income. As a result, we have also increased our wealth. We can do more of what we desire.

4. Recall in Module-3: Trade, that students were asked what they would like to do for a career. With these future careers in mind, discuss with students why it is important to specialize. Why doesn’t everyone produce everything that they consume? By specializing people become better at producing one thing than others. Specializing enhances our comparative advantage. It makes




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us more productive. That is, we can produce more output per hour (or per unit of input) than before.

5. Refer back to Module-3, 2Lesson-I: Vegetables for beef. Displaying NVisual-3: Comparative advantage.

LQuestion: Who has a comparative advantage in vegetable production?

Answer: val. LQuestion: Who has a comparative advantage in raising cows? Answer: max.

lESSon oUTlInE

lEsson-i: Montana bananas.

Materials:NVisual-2: Comparative advantageNVisual-4: Montana bananas2Lesson-I: Montana bananas

PlaceNVisual-2: Comparative advantage on the overhead and present a new question to the class;LQuestion: Why are bananas not produced in Montana?Answer: climate may be a factor, but hot houses could be built to ensure suitable banana tree habitat.There is a cost to building banana hot houses. The cost is not only the dollar expense of building the houses but also the opportunity cost, the value of the next best alternative foregone. Montana weather is conducive to growing wheat, not bananas. And indeed, Montana has a lower opportunity cost to grow wheat than bananas. Montana has a comparative advantage in growing wheat, South America has a comparative advantage in growing bananas. Handout 2Lesson-I: Montana bananas. Work through the production possibility frontier with your students.

1. Explain the production possibility frontier for Montana as shown in 2Lesson-I: Montana bananas. Enough resources exist for Montana to produce 100 units of wheat or two units of bananas. A combination




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of wheat and bananas can be produced, giving up some wheat to produce some bananas.

2. Explain that the production possibilities frontier (PPF) for Montana shows this. You may wish to use NVisual-4: Montana bananas showing the opportunity cost and production possibilities frontier covering the bottom matrix. The production possibilities frontier shows the maximum amount of wheat and bananas that Montana can produce with a given set of resources. Because the line is linear, Montana will always give up the same amount of wheat to increase banana production by one unit (this assumption is not always true in the real world).

The production possibilities given in the matrix show the maximum production possible given current technology and resources in a given period of time. The frontiers show the efficient level of production if all resources are fully utilized. It is possible to produce at any point below the frontier (between the origin and the frontier) is possible to produce but inefficient. In this case all resources are not being fully utilized or fully employed. Production is not possible at any point beyond the frontier (Northeast of the frontier). Consumption is possible beyond the frontier if trade permits it.

3. Discuss with students that the amount of wheat given up to produce bananas is the opportunity cost for Montana to produce bananas. This follows the same logic as the example with vegetables and beef. It can be seen on the graph that Montana can produce a combination of the two goods, such as 50 units of wheat and one unit of bananas. The opportunity cost is the amount of one good that must be given up to produce the other. For Montana to produce one unit of bananas it must give up 50 units of wheat. This answers question one of 2Lesson-I Worksheet: Montana bananas which asks:

LQuestion: What is the opportunity cost for Montana to produce one unit of bananas? (This is also how much Montana would be willing to pay for one unit of bananas).

Answer: The opportunity cost for montana to produce one unit of bananas is 50 units of wheat.

Notice, the opportunity cost is not given by the points on the frontier—50 wheat for one unit of bananas or 75 wheat for one half




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unit of bananas—rather it is the amount given up for one more unit, as read along the axes. Montana gives up 100 minus 50, 50 units of wheat, to produce the first unit of bananas or 100 minus 75, 25 units of wheat, to produce the first one half unit of bananas (which is the same as 50 units of wheat for 1 unit of bananas).

4. Now look at the production possibilities for South America. South America can produce 20 units of wheat or 100 units of bananas.

5. Have students work through the top paragraph of 2Lesson-I: Montana bananas describing the opportunity cost for South America to produce bananas. South America must give up 20 units of wheat to produce 100 units of bananas, which, because our production possibilities are linear, means that South America must give up producing.2 units of wheat to produce one unit of bananas (20÷100).

6. The producer with the lower opportunity cost in production has the comparative advantage. We know that it costs Montana 50 units of wheat to produce one unit of bananas, and it costs South America.2 units of wheat to produce one unit of bananas. Hence, South America has the comparative advantage in producing bananas. South America has the lowest opportunity cost to produce bananas (.2 units of wheat versus 50 units of wheat). This answers question 2 of 2Lesson-I: Montana bananas.

7. Give students a few minutes to read through the remainder of 2Lesson-I: Montana bananas. See if the students can solve questions 3 and 4 on their own.

LQuestion: What is the opportunity cost for South America to produce one unit of wheat?

Answer: montana must give up two units of bananas to produce 100 units of wheat which is the same as.02 units of bananas for one unit of wheat. The opportunity cost for montana to produce one unit of wheat is.02 units of bananas. South America must give up five units of bananas to produce one unit of wheat (100÷20).

LQuestion: Who has the comparative advantage in producing wheat?

Answer: The opportunity cost for south America to produce one unit of wheat is five units of bananas.




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This answers question 3 and 4 in 2Lesson-I: Montana bananas. Because Montana has the lower opportunity cost to produce wheat (.02 units of bananas versus five units of bananas for South America) Montana has the comparative advantage in producing wheat.

8. Discuss question 6 which asks: LQuestion: How much is South America willing to pay for one

unit of wheat? Answer: Five units of bananas, which is their opportunity cost

to produce the wheat.

9. LQuestion: Using wheat and bananas as currency, have students think about how much each country would be willing to pay for the products produced.

Answer: each country is willing to pay as much as it costs them to produce the product. what is montana willing to pay for bananas? it costs montana 50 units of wheat to produce one unit of bananas. montana is willing to pay up to 50 units of wheat for one unit of bananas.

This answers question 6 in 2Lesson-I: Montana bananas. It costs South America.2 units of wheat to produce one unit of bananas. South America is willing to accept anything over.2 units of wheat for one unit of bananas. There is a lot of leeway for Montana and South America to negotiate an acceptable trading price for bananas. Even if transaction costs are high, which are not included in our model, voluntary trade will likely occur.

10. LQuestion: What is the lowest price Montana will accept for one unit of wheat?

Answer: it costs montana.02 units of bananas to produce one unit of wheat. montana will accept anything over.02 units of bananas in exchange for one unit of wheat.

Again there is potential for voluntary trade at a price between.02 and five units of bananas for one unit of wheat. This is summarized in the matrix on the bottom of NVisual-3: Montana bananas.

11. Discuss questions 7 and 8 which asks: LQuestion 7: Assume Montana and South America have decided

to specialize producing only where they have the comparative




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advantage. They consume all that is produced and have negotiated a price of one banana for ten wheat. If Montana consumes 50 units of wheat and sells the rest, how much wheat and bananas will South America consume?

LQuestion 8: Are there potential gains from trade? Answer: if the price of one unit of bananas is set at ten units of wheat

(between what montana is willing to pay and south America is willing to accept), montana can consume 50 units of wheat (100 produced less 50 traded) and five units of bananas (five units of bananas bought at ten wheat each equals the 50 wheat traded). consumption will be beyond the production possibilities frontier for montana (this is shown as point A on Nvisual-4: montana bananas). south America will be able to consume 95 units of bananas (100 produced less five sold) and the 50 units of wheat purchased (point b on Nvisual-4: montana bananas, Figure 4.3: south America production possibilities frontier). clearly, both countries have gained from trade. This is true for individuals, regions, and nations that specialize where they have a comparative advantage and trade for other goods and services. Trade can increase their consumption.

lEsson-ii: lawn CarE.

Materials:2Lesson-II: Lawn care

Handout 2Lesson-II: Lawn care. Have students examine the production possibilities frontier.LQuestion: Who has the absolute advantage in mowing?Answer: louLQuestion: Who has the absolute advantage in trimming?Answer: louHave students raise their hand if they believe there are potential benefits from trade. Have students work through the problem set in 2Lesson-II: Lawn care or take it home for a homework assignment.

When the assignment is completed, discuss with the students that working with each other allows each individual to specialize. By specializing where we have the comparative advantage, each party is better off. This is also true with trade. Instead of having a lawn business you can imagine each party is producing a different good, wheat and




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barley, for example. Even though one party in this example is better at growing both and has the absolute advantage in both, there are benefits from trade.

CloSURE

lEsson rEviEw

1. LQuestion: What is opportunity cost? Answer: The value of the best alternative foregone.

2. LQuestion: What is the comparative advantage? Answer: The ability to produce at the lowest opportunity cost.

3. LQuestion: Why do we trade? Answer: There are mutual gains from trade. All parties voluntarily

entering into trade will benefit. Trade increases our consumption possibilities, it increases wealth.

4. LQuestion: Should Montana grow bananas? Answer: no. montana does not have the comparative advantage

to grow bananas. montana resources are better used to grow wheat and other crops that have a lower opportunity cost relative to other locations.

ASSESSMEnT

MultiplE-ChoiCE quEstions

1. LQuestion: A producer has the comparative advantage when:a. Production costs are less than sales revenues. b. They have the lowest opportunity cost for production.c. Their opportunity cost is greater than the next best alternative.d. They specialize through the use of an assembly line.

2. LQuestion: A producer with absolute advantage:a. Will always have the comparative advantage.




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b. Can produce more of a product than another entity with a given set of resources.

c. Will never benefit from trade.d. Will only benefit from trade with developed countries.

3. LQuestion: If Johnny and Carrie are producing wheat and cars, Johnny has the comparative advantage in wheat when:a. Johnny can produce more wheat than Carrie given the same set

of resources.b. There are gains from trade between Johnny and Carrie.c. Johnny gives up fewer units of cars to produce wheat than

Carrie does.d. Johnny gives up more units of cars to produce wheat than

Carrie does.

4. LQuestion: When can a country consume at a point that sits outside (northeast) of the production possibilities frontier?a. When the country produces efficiently.b. When the country uses the best available technology in

production.c. A country can never consume beyond the production

possibilities frontier.d. It is only possible with trade.

5. LQuestion: Assume France can produce 4 bicycles or 4 tons of grapes and Germany can produce 2 bicycles or 4 tons of grapes. Which country has the comparative advantage in producing grapes?a. France. France only gives up 1 bicycle for each ton of grapes.b. Germany. Germany only gives up ½ a bicycle for each ton of

grapes.c. France. France can produce more bicycles. d. Neither country has the comparative advantage in grape

production.

answErs:

1. b.




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2. b.3. c.4. d5. b

DISCUSSIon/ESSAy QUESTIonS1. LQuestion: Farmer Fae has the absolute advantage in producing

vegetables and cows over meat eatin’ Max. Because farmer Fae can produce more of both goods with the give set of resources there is no benefit to be gained if farmer Fae trades. True or false? Explain.

Answer: As discussed in the comparative advantage section above, even though Fae has the absolute advantage in both goods, there are gains to trade if she does not have the comparative advantage in both goods. you may want to share this example with your students to reemphasize that there are gains from trade even when one entity (whether an individual, group, or country) can produce more of all goods with the given set of resources.

2. LQuestion: Dick and Jane have just purchased some agricultural land in Montana. Jane would like to grow pineapple because it is her favorite fruit. Dick would rather grow wheat. Pretend you are Dick and explain to Jane, in economic terms considering opportunity cost and comparative advantage, why it would be more productive to grow wheat.

Answer: montana does not have a comparative advantage to grow pineapple. requiring a warm climate, pineapples could be grown in hot houses in montana. but one must consider what else could be done with the resources used to construct hot houses and the land used to grow pineapple. montana’s climate is better suited to growing wheat where hot houses are not necessary and the opportunity cost is lower. in fact, the opportunity cost to grow wheat in montana is lower than other regions of the country. montana has a comparative advantage to grow wheat, not pineapple.




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NOTES

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Module-4Visual

Visual-1: absolute adVantage

The abiliTy of one enTiTy To produce more Than anoTher wiTh a given seT of inpuTs

absoluteadvantage

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Module-4Visual

Visual-2: ComparatiVe adVantage

The abiliTy To produce aT The lowesT opporTuniTy cosT

is The value of The nexT besT alTernaTive given up

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Module-4Visual

Visual-3: ComparatiVe adVantage

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Module-4Visual

Visual-4: montana bananas

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south americaProduction Possibilities frontier

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montanaProduction Possibilities frontier

oPPortunity cost

Production Possibilities frontier




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lesson-i: montana bananas

Montana bananas

As shown in the production possibilities Montana can produce 100 units of wheat or two units of bananas and South America can produce 20

units of wheat or 100 units of bananas. Below the production possibilities Frontiers (PPF). The PPF shows the combination of wheat and bananas that can be produced by Montana and South America.

Production can be any combination of wheat and bananas along (or inside) the production possibilities frontier. Production along the frontier means that all facilities are being used to capacity. If facilities are idle the point of production will be inside the frontier. Production cannot take place beyond the frontier unless there is a change in technology or resource availability. Assume production is on the frontier.

Production Possibilities frontier




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Montana bananas

The opportunity cost to produce bananas is the quantity of wheat that must be given up. South America must give up 20 units of wheat to

produce 100 units of bananas. Because the line is linear, we can also say that it costs South America.2 units of wheat to produce one unit of bananas (20÷100). Hence, the opportunity cost for South America to produce one unit of bananas is.2 units of wheat. South America would be willing to trade one unit of bananas in exchange for.2 units of wheat.

The opportunity cost to produce wheat is the quantity of bananas that must be given up. The opportunity cost for Montana to produce one unit of wheat is.02 units of bananas (2÷100). Montana would be willing to trade one unit of wheat in exchange for.02 units of bananas.

The producer with the comparative advantage has the lowest opportunity cost.

south americaProduction Possibilities frontier

montanaProduction Possibilities frontier




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quEstions:

1. LQuestion: What is the opportunity cost for Montana to produce one unit of bananas? (This is also how much Montana would be willing to pay for one unit of bananas).

2. LQuestion: Who has the comparative advantage in producing bananas?

3. LQuestion: What is the opportunity cost for South America to produce one unit of wheat?

4. LQuestion: Who has the comparative advantage in producing wheat?

5. LQuestion: If both countries specialize and produce only where they have a comparative advantage how much wheat and bananas will be produced?

6. LQuestion: How much is South America willing to pay for one unit of wheat?

7. LQuestion: Assume Montana and South America have decided to specialize producing only where they have the comparative advantage. They consume all that is produced and have negotiated a price of one banana for ten wheat. If Montana consumes 50 units of wheat and sells the rest, how much wheat and bananas will South America consume?

8. LQuestion: Are there potential gains from trade? Explain, using your answer to question seven.





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lawn CarE

Lou and Sid are both starting summer lawn care businesses. Lou is a very good worker. Lou can mow one acre in one hour or trim one acre in two

hours. Sid is slower. It takes Sid four hours to mow a single acre. Sid is also slower at trimming. It takes Sid three hours to trim one acre. The production possibility shows the time it takes Lou and Sid to mow and trim.

lesson-ii: lawn Care

quEstion:

The opportunity cost is what you forego to do something else. For example, if Lou decides to mow one acre, Lou will give up trimming ½ an acre. If Lou trims an acre, Lou will give up the ability to mow two acres. Fill in the opportunity cost for Sid to mow and trim.




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lawn CarE

Lou and Sid can each receive ten dollars per acre that is mowed and

trimmed. If they do not work together, it will take Lou three hours to mow and trim one acre. Lou will earn $3.33 per hour ($10÷3).

Alternatively, Lou and Sid can work together and each specialize in their area of comparative advantage. Assume they equally split the ten dollars per acre. Since it takes Lou one hour to mow Lou will now earn five dollars per hour.

quEstions:

1. LQuestion: Who has the comparative advantage (lowest opportunity cost) to mow?

2. LQuestion: Who has the comparative advantage (lowest opportunity cost) to trim?

3. LQuestion: How much will Sid earn per hour for mowing and trimming one acre?

4. LQuestion: How much will Sid earn per hour when specializing?

5. LQuestion: Even though Lou is faster at both mowing and trimming, is Lou better off working alone or trading skills with Sid? Is Sid better off working alone?

lesson-ii: lawn Care




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lesson assessment

MultiplE-ChoiCE quEstions

1. LQuestion: A producer has the comparative advantage when:a. Production costs are less than sales revenues. b. They have the lowest opportunity cost for production.c. Their opportunity cost is greater than the next best alternative.d. They specialize through the use of an assembly line.

2. LQuestion: A producer with absolute advantage:a. Will always have the comparative advantage.b. Can produce more of a product than another entity with a given set of

resources.c. Will never benefit from trade.d. Will only benefit from trade with developed countries.

3. LQuestion: If Johnny and Carrie are producing wheat and cars, Johnny has the comparative advantage in wheat when:a. Johnny can produce more wheat than Carrie given the same set of

resources.b. There are gains from trade between Johnny and Carrie.c. Johnny gives up fewer units of cars to produce wheat than Carrie does.d. Johnny gives up more units of cars t produce wheat than Carrie does.

4. LQuestion: When can a country consume at a point that sits outside (northeast) of the production possibilities frontier?a. When the country produces efficiently.b. When the country uses the best available technology in production.c. A country can never consume beyond the production possibilities

frontier.d. It is only possible with trade.

5. LQuestion: Assume France can produce 4 bicycles or 4 tons of grapes and Germany can produce 2 bicycles or 4 tons of grapes. Which country has the comparative advantage in producing grapes?a. France. France only gives up 1 bicycle for each ton of grapes.b. Germany. Germany only gives up ½ a bicycle for each ton of grapes.c. France. France can produce more bicycles. d. Neither country has the comparative advantage in grape production.




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disCussion/Essay quEstions

1. LQuestion: Farmer Fae has the absolute advantage in producing vegetables and cows over meat eatin’ Max. Because farmer Fae can produce more of both goods with the give set of resources there is no benefit to be gained if farmer Fae trades. True or false? Explain.

2. LQuestion: Dick and Jane have just purchased some agricultural land in Montana. Jane would like to grow pineapple because it is her favorite fruit. Dick would rather grow wheat. Pretend you are Dick and explain to Jane, in economic terms considering opportunity cost and comparative advantage, why it would be more productive to grow wheat.

lesson assessment




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Montana bananas

1. LQuestion: What is the opportunity cost for Montana to produce one unit of bananas? (This is also how much Montana would be willing to pay for one unit of bananas).

Answer: 50 units of wheat. The producer with the comparative advantage has the lowest opportunity cost.

2. LQuestion: Who has the comparative advantage in producing bananas? Answer: in south America. The opportunity cost for one unit of bananas

is equal to.2 units of wheat, where in montana one unit of bananas is costs 50 units of wheat.

3. LQuestion: What is the opportunity cost for South America to produce one unit of wheat?

Answer: five units of bananas.

4. LQuestion: Who has the comparative advantage in producing wheat? Answer: montana. The opportunity cost for one unit of wheat in montana

is equal to.02 units of bananas, where in south America one unit of wheat costs.5 units of bananas.

5. LQuestion: If both countries specialize and produce only where they have a comparative advantage, how much wheat and bananas will be produced?

Answer: montana will produce 100 units of wheat and south America will produce 100 units of bananas.

6. LQuestion: How much is South America willing to pay for one unit of wheat?

Answer: five units of bananas which is their opportunity cost to

lESSon-I: AnSwER KEy




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produce the wheat.

Montana bananas

7. LQuestion: Assume Montana and South America have decided to specialize producing only where they have the comparative advantage. They consume all that is produced and have negotiated a price of one banana for ten wheat. If Montana consumes 50 units of wheat and sells the rest, how much wheat and bananas will South America consume?

Answer: south America will consume 95 units of bananas (100 produced less five traded) and 50 units of wheat.

8. LQuestion: Are there potential gains from trade? Explain, using your answer to question seven.

Answer: yes, both countries can consume beyond their production possibilities frontier.

lESSon-I: AnSwER KEy

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Module 4Answer


2131

lESSon-II: AnSwER KEy

quEstion:

The opportunity cost is what you forego to do something else. For example, if Lou decides to mow one acre, Lou will give up trimming ½ an acre. If Lou trims an acre, Lou will give up the ability to mow two acres. Fill in the opportunity cost for Sid to mow and trim.

lawn CarE

Lou and Sid are both starting summer Lawn care businesses. Lou is a very good worker. Lou can mow one acre in one hour or trim one acre in two

hours. Sid is slower. It takes Sid four hours to mow a single acre. Sid is also slower at trimming. It takes Sid three hours to trim one acre. The production possibility below shows the time it takes Lou and Sid to mow and trim.




Module 4Answer


132 2

lESSon-II: AnSwER KEy

lawn CarE

Lou and Sid can each receive ten dollars per acre that is mowed and trimmed. If they do not work together, it will take Lou three hours to mow and trim one acre. Lou will earn $3.33 per hour ($10÷3).

Alternatively, Lou and Sid can work together and each specialize in their area of comparative advantage. Assume they equally split the $10 per acre. Since it takes Lou one hour to mow Lou will now earn $5 per hour.

1. LQuestion: Who has the comparative advantage (lowest opportunity cost) to mow?

Answer: lou has the comparative advantage to mow. The opportunity cost to mow for Fast lou is equal to ½ acre in one hour. The opportunity cost for slow sid is equal to 4/3 acre in one hour.

2. LQuestion: Who has the comparative advantage (lowest opportunity cost) to trim?

Answer: sid has the comparative advantage to trim. The opportunity cost for Fast lou is equal to two acre in one hour. The opportunity cost for slow sid is equal to 3/4 acre in one hour. slow sid has the lowest opportunity cost.

3. LQuestion: How much will Sid earn per hour for mowing and trimming one acre?

Answer: sid will earn $1.43 per hour to mow and trim an acre (ten dollars per acre divided by seven hours worked)

4. LQuestion: How much will Sid earn per hour when specializing? Answer: when sid specializes by only trimming, sid will earn $1.67 per

hour (five dollars per acre divided by three hours worked)

5. LQuestion: Even though Lou is faster at both mowing and trimming, is Lou better off working alone or trading skills with Sid? Is Sid better off working alone?

Answer: both lou and sid can earn more by working together and specializing in the area where each has a comparative advantage.

elm #4 comparative advantage

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