1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade between individuals or countries? Is it absolute advantage or comparative advantage? Why?

Absolute advantage entails the capability of an individual, company, region or country to produce more products using fewer resources than the competitor (Kurtz, & Boone, 2009). Therefore, the concept of absolute advantage is based on the differentiation between nations whereby they have varying ability to produce goods efficiently. On the other hand, comparative advantage can be explained as the ability of a region or nation to produce certain goods and services over others at a lower marginal and opportunity cost (Kurtz, & Boone, 2009). The trade patterns are based on the principle of comparative advantage. Moreover, the opportunity cost that is based upon by the comparative advantage measures the real cost to a person, region or country of producing a certain product. Therefore, an individual will use the information of opportunity cost to determine whether to produce or buy a good from someone.

1. Let us assume two students must prepare a presentation for their marketing class. As part of their class presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Larry 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Kate 12 hours to do the series of the calculations and 20 hours to prepare the PPT slides.
2. How much time would it take the two students to complete the project if they use comparative advantage and specialize in calculating or preparing slides?

If the two students divide the two tasks equally, it will take the students 11 hours for the calculation and 15 hours to prepare the slides. The total number of hours will be 26 hours.

For the calculation         10 hours + 12 hours = 11 hours

2

For preparing slides       10hours + 20 hours = 15 hours

2

1. How much time would it take the two students to complete the project if they use comparative advantage and specialize in calculating or preparing slides?

If one student (Kate) specializes in calculating and the other (Larry) specializes in preparing power point presentation, it will take 22 hours for the two students o complete the project.

10 hours + 12 hours = 22 hours

1. If Larry and Kate have the same opportunity cost of \$5 per hour, is there a better solution than for each to specialize in calculating or preparing slides?

If Kate specializes in preparing slides, her opportunity cost will be \$100. Kate would be better off if she paid Larry any amount that is less than \$100 to prepare slides. Larry’s opportunity cost for preparing slides is \$50; therefore, he would be better off if Kate paid him any amount that ranges between \$50 and \$100 to prepare slides.

1. Let us assume there are only two countries in the world, and the two countries face the following production possibilities frontiers. Further assume that the two countries produce popcorn and peanuts.
2. Assume that country A and country B decide to use half of the resources in the production of each good. Indicate the points of the maximum output of each good on the graphs for each country as point A under such resource use.

Country A would be producing 75 units of popcorns and 125 units of peanuts (point A on the country’s production possibility frontier). Similarly, country B would be producing 150 units of popcorns and 50 units of peanuts (point A of the country’s production possibility frontier).

1. Assume the two countries choose autarky and do not trade. What would be the total world production of popcorn and peanuts under the autarky?

Autarky entails a society or country being economically independent (Berghoff, & Balbier, 2013). Therefore, if the countries choose not to trade, the world’s total production of popcorns would be 225 units while that of peanuts would be 175 units.

Popcorns: 300 units + 150 units =225 units

2

Peanuts:    250 units + 100 units = 175 units

2

1. Assume that each country decides to specialize in either popcorn or peanut based on its respective comparative advantage. Under the specialization, what is the total production of popcorn and peanuts?

Under specialization, the following are the total number of popcorns and peanuts. The total world production of popcorns would be 300 units while the production of peanuts would be 250 units.

1. Assume country A and B decide to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country receives from trade. Label these points on the two graphs “B.”

Country A would be producing 250 units of peanuts and would trade 100 units to country B. Country A would then be left with 150 units of peanuts. In the process, country A would receive 100 units of popcorns from country B. On the graph, country A would have 250 units of popcorns and 150 units of peanuts labeled as ‘B’. On the other hand, country B would be producing 300 units of popcorns and would trade 100 units to country A. Therefore, country B would be left with 200 units of popcorns. Similarly, country B would then receive 100 units of peanuts from country A. On the graph, country B would have 200 units of popcorns and 200 units of peanuts labeled as ‘B’.

References

Berghoff, H., & Balbier, U. A. (Eds.). (2013). The East German Economy, 1945-2010: Falling Behind Or Catching Up?. Cambridge University Press.

Kurtz, D. L., & Boone, L. E. (2009). Contemporary business. Mason, OH: South-Western Cengage Learning.

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