(a) Define the following terms: (1) Absolute advantage; (2) Comparative advantage. Consider the following table, where the numbers indicate the number of hours needed to make 1 unit of each good: Bread Butter Jack 1 1 Jill 4 1 Who has an absolute advantage in producing each of the two goods? Who has a comparative advantage in producing each of the two goods? (b) Suppose Jack and Jill each have 8 hours of labour. Draw the Production Possibilities Frontier for Jack and Jill. If before trade both Jack and Jill each spend half their time producing each good, label the no-trade production point in your graph. (c) Now suppose that Jack and Jill are allowed to trade with each other. Suppose that the free trade relative price is 2 butter for 1 bread. Add the free trade price line to the diagram of the Production Possibilities Frontier, and show the free trade production and consumption points. What will Jack and Jill produce in the free trade equilibrium? Will both Jack and Jill gain from trade? Explain your answers.

(a) Define the following terms: (1) Absolute advantage; (2) Comparative advantage. Consider the following table, where the numbers indicate the number of hours needed to make 1 unit of each good: Bread Butter Jack 1 1 Jill 4 1 Who has an absolute advantage in producing each of the two goods? Who has a comparative advantage in producing each of the two goods? (b) Suppose Jack and Jill each have 8 hours of labour. Draw the Production Possibilities Frontier for Jack and Jill. If before trade both Jack and Jill each spend half their time producing each good, label the no-trade production point in your graph. (c) Now suppose that Jack and Jill are allowed to trade with each other. Suppose that the free trade relative price is 2 butter for 1 bread. Add the free trade price line to the diagram of the Production Possibilities Frontier, and show the free trade production and consumption points. What will Jack and Jill produce in the free trade equilibrium? Will both Jack and Jill gain from trade? Explain your answers.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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