Problem 1. (Absolute and Comparative Advantage) You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom:
Labor Hours Required to Produce One Unit
United Kingdom United States
Wheat 2 1
Cloth 6 5
a. What is the opportunity of producing a unit of wheat in the United Kingdom? In the United States?
b. Which country has an absolute advantage in producing wheat? In producing cloth?
c. Which country has a comparative advantage in producing wheat? In producing cloth?
d. Which country should specialize in producing wheat? In producing cloth?
Problem 2. (Shape of the PPF) Suppose a production possibilities frontier includes the following combinations:
Cars Washing Machines
0 1,000
100 600
200 0
a. Graph the PPF, assuming that it has no curved segments
b. What is the cost of producing an additional car when 50 cars are being produced?
c. What is the cost of producing an additional car when 150 cars are being produced?
d. What is the cost of producing an additional washing machine when 50 cars are being produced? When 150 cars are being produced?
e. What do your answers tell you about opportunity costs?