Contact Details
„
„
ECON 1 – Section 22
„
Comparative
Advantage and Trade.
„
„
GSI: Ramon Estopina
Office Hours: No this week !!
Office: Evans 508-7
Email: [email protected]
Handouts (only sections 104 & 133) after
class in: http://www.ocf.berkeley.edu/~jaychen/econ1/
„
Nov. 25th, 2002
ECON 1 – Section 22 – Page 1
GSI: R. Estopina
Please read: Read before downloading!.
Nov. 25th, 2002
Section 22 Agenda
„
Pick up your Midterm Exams (and
relax) !!
For our sections
Midterm Grades review (10 min).
„
Problem 3.4 (10 min).
„
Problem 3.6 (10 min).
„
„
Problem 3.9 (10 min).
„
„
Re-cap (2 min)
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ECON 1 – Section 22 – Page 3
GSI: R. Estopina
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58 = A44 = B30 = CWorry a lot = 25 to 29
In serious trouble = <25
Nov. 25th, 2002
<file>
ECON 1 – Section 22 – Page 4
GSI: R. Estopina
Recap Quiz - 1
Percentile
MT-1
MT-2
95th
61.5
66
90th
56
63
85th
53
61
80th
49
59
70th
44.8
55.5
60th
41
52.5
50th
37
49
40th
34
45.5
30th
30
41.25
20th
25.5
35.25
10th
19.5
27
ECON 1 – Section 22 – Page 5
Median=49 / Mean=46.8 / SD: 14
Max=72.5 / Min=2
Nov. 25th, 2002
Midterm Review - 2
And, what you all
wanted to know
(and were not
afraid to ask):
Cutoff scores:
104 – Mean: 42 / SD: 13
133 – Mean: 43 / SD: 14
For all the class:
„
„
GSI: R. Estopina
Midterm-2 Review
„
Nov. 25th, 2002
ECON 1 – Section 22 – Page 2
„
If one person can perform a task in fewer hours
than another, you know the person has
____________ in performing the task :
1) an absolute advantage.
2) a comparative advantage.
3) both a comparative advantage and an absolute
advantage.
4) neither an absolute nor a comparative
advantage.
5) either an absolute or a comparative advantage..
GSI: R. Estopina
Nov. 25th, 2002
ECON 1 – Section 22 – Page 6
GSI: R. Estopina
1
Recap Quiz - 2
Recap Quiz - 3
If a person's opportunity cost of performing a task is
lower than another person's, you know the person has
_________________ in performing the task.
„
„
1) an absolute advantage.
2) a comparative advantage.
3) both a comparative advantage and an absolute
1) where you have comparative advantage.
2) where you have absolute advantage.
3) with the highest opportunity cost.
4) with the lowest opportunity cost.
5) that have the lowest price.
advantage.
4) neither an absolute nor a comparative advantage.
5) either an absolute or a comparative advantage.
Nov. 25th, 2002
ECON 1 – Section 22 – Page 7
GSI: R. Estopina
Nov. 25th, 2002
Nancy and Bill are auto mechanics.
Nancy takes 4 hours to replace a
clutch and 2 hours to replace a set of
brakes.
„ Bill takes 6 hours to replace a clutch
and 2 hours to replace a set of
brakes.
„
Nov. 25th, 2002
ECON 1 – Section 22 – Page 9
GSI: R. Estopina
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If Bill and Nancy open a motor repair shop:
Nov. 25th, 2002
„
Absolute Advantage: If it takes you
fewer hours to perform a task than the
other person.
„ Comparative Advantage: If your
opportunity cost of performing a task is
lower than the other person’s
opportunity cost.
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GSI: R. Estopina
Let’s see:
„
ECON 1 – Section 22 – Page 11
ECON 1 – Section 22 – Page 10
Problem 3.4 (cont’d)
Remind:
Nov. 25th, 2002
GSI: R. Estopina
a) Nancy should work only on clutches and Bill
should work only on brakes.
b) Bill has a comparative advantage at replacing
brakes.
c) Nancy has an absolute advantage at replacing
clutches.
d) Nancy has a comparative advantage at replacing
clutches.
e) All but one of above statements are correct.
Problem 3.4 (cont’d)
„
ECON 1 – Section 22 – Page 8
Problem 3.4 (cont’d)
Problem 3.4 (F&B page 70)
„
According to the Low-Hanging Fruit Principle,
in expanding production of a good, you
should first employ those resources
GSI: R. Estopina
„
Nancy
Bill
Or also:
Nancy
Bill
Nov. 25th, 2002
Clutches
4 hours/clutch
6 hours/clutch
Brakes
2 hours/brakes
2 hours/brakes
Clutches
Brakes
0.25 clutches/hour
0.16 clutches/hour
0.5 clutches/hour
0.5 clutches/hour
ECON 1 – Section 22 – Page 12
GSI: R. Estopina
2
Problem 3.4 (cont’d)
Problem 3.4 (Conclusion)
Remember:
„
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OCBrakes = Loss in Clutches / Gain in Brakes
OCClutches = Loss in Brakes / Gain in Clutches
So we have:
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OCClutches
OCBrakes
Nancy
0.5/0.25 = 2
0.25/0.5 = 0.5
Bill
0.5/0.16 = 3
0.16/0.5 = 0.33
Nov. 25th, 2002
ECON 1 – Section 22 – Page 13
GSI: R. Estopina
„
Bill’s opportunity cost of replacing a set of brakes is
lower than Nancy’s, because he must forgo replacing
only one-third of a clutch, whereas Nancy must forgo
replacing half a clutch.
Bill thus has a comparative advantage at replacing
brakes. Similarly, Nancy has a comparative advantage
at replacing clutches, as well as an absolute
advantage at replacing clutches, because she can do it
faster than Bill.
But if all the customers want only clutch replacements
rather than brake replacements, Bill should help Nancy
to replace clutches. (Thus a is wrong.)
Nov. 25th, 2002
„
„
Larry and Harry stranded together on a
dessert island.
They can only make beer or pizza
(funny island!!)
Quantities are unlimited but labor is
scarce. H & L each can spend 10 hours
a day making beer or pizza (they need
time to drink and eat, too!!!!).
Nov. 25th, 2002
ECON 1 – Section 22 – Page 15
GSI: R. Estopina
„
They can produce the next quantities per hour:
Harry
Larry
„
Beers/Day
Beers/Day
10
1bottle/hour
0.5 bottle/hour
0.2 pizza/hour
1.5 pizza/hour
Nov. 25th, 2002
ECON 1 – Section 22 – Page 16
GSI: R. Estopina
Problem 3.6 (cont’d)
Harry’s
PPC
5
„
Larry’s
PPC
Pizzas/Day
Pizzas/Day
„
15
B) Who has an absolute advantage in
making pizza? In brewing beer?
Nov. 25th, 2002
<file>
Pizza
The daily PPCs for Harry and Larry:
2
„
Beer
A) Draw the daily production possibilities
curves (PPCs) for H & L.
Problem 3.6 (cont’d)
„
GSI: R. Estopina
Problem 3.6 (cont’d)
Problem 3.6 (F&B page 70)
„
ECON 1 – Section 22 – Page 14
ECON 1 – Section 22 – Page 17
GSI: R. Estopina
„
Larry has an absolute advantage in making
pizza; he can produce more pizza per hour
than Harry.
Harry has an absolute advantage in brewing
beer.
C) Who has a comparative advantage in
making pizza? In brewing beer?
Nov. 25th, 2002
ECON 1 – Section 22 – Page 18
GSI: R. Estopina
3
Problem 3.6 (cont’d)
„
As we saw before:
„
„
„
Problem 3.6 (cont’d)
„
OCBeer = Loss in Pizzas / Gain in Beer
OCPizzas = Loss in Beer / Gain in Pizzas
So we have:
OCBeer
OCPizza
Harry
0.2/1 = 0.2
1/0.2 = 5
Larry
1.5/0.5 = 3
0.5/1.5 = 0.3
Nov. 25th, 2002
ECON 1 – Section 22 – Page 19
GSI: R. Estopina
„
Nov. 25th, 2002
Problem 3.6 (cont’d)
„
„
„
Harry wants 2 beers and as much pizza as
he can eat each day.
Larry wants 2 pizzas and as much beer as
he can drink each day.
D) If each man is self-reliant, how
much beer and pizza will H & L eat and
drink?
Nov. 25th, 2002
ECON 1 – Section 22 – Page 21
ECON 1 – Section 22 – Page 20
GSI: R. Estopina
„
Remember:
Harry
Larry
„
„
Beer
1bottle/hour
0.5 bottle/hour
Nov. 25th, 2002
ECON 1 – Section 22 – Page 22
The joint PPC for Harry and Larry:
Beers/Day
„
Suppose they can trade with each
other.
„ Draw their joint PPC, and give an
example of a trade that will make
each of them better off.
15
„
Larry’s
PPC
10
Harry’s
PPC
15
<file>
GSI: R. Estopina
Problem 3.6 (cont’d)
„
ECON 1 – Section 22 – Page 23
Pizza
0.2 pizza/hour
1.5 pizza/hour
If Harry wants 2 beers he’ll work 2 hours. The next 8
hours he’ll make 8 hours*0.2 pizza/hour = 1.6 pizzas.
If Larry wants 2 pizzas he’ll work 1 hour and 20 min.
The next 8 hours and 40 min he’ll brew 8.66
hours*0.5 bottle/hour = 4.33 bottles of beer.
Problem 3.6 (cont’d)
Nov. 25th, 2002
GSI: R. Estopina
Problem 3.6 (cont’d)
Now suppose their preferences are as
follows:
„
Larry has a comparative advantage in
making pizza. His opportunity cost of
producing one pizza is 1/3 of a beer, while
Harry’s opportunity cost of producing one
pizza is 5 beers.
But Harry has a comparative advantage in
brewing beer. His opportunity cost of
producing one beer is 1/5 of a pizza, while
Larry’s opportunity cost of producing one
beer is 3 pizzas.
GSI: R. Estopina
Nov. 25th, 2002
If each specializes
completely in the
good for which he
has a comparative
advantage, Harry
will produce 10
beers and Larry will
produce 15 pizzas.
17 Pizzas/Day
ECON 1 – Section 22 – Page 24
GSI: R. Estopina
4
Problem 3.6 (Conclusion)
Beers/Day
„
Larry’s
PPC
15
10
L&H
part D
6.3
15
3.6
Nov. 25th, 2002
„
Harry’s
PPC
17
Suppose they trade 5 pizzas for 5
beers, so that Harry will consume 5
pizzas and 5 beers, and Larry will
consume 10 pizzas and 5 beers.
Each will thus consume more pizza
and beer than in part (d). Other
trades are possible. The only
requirements are that the chosen
output be possible and that Harry
and Larry each consume at least as
much of both goods as in part (d).
Problem 3.9 (F&B page 71)
Inlandia and Outlandia both can produce
oranges and oil.
„
„
A) Does the low-hanging-fruit principle apply in
either of these 2 economies?
„
Pizzas/Day
ECON 1 – Section 22 – Page 25
GSI: R. Estopina
Nov. 25th, 2002
Problem 3.9 (cont’d)
„
„
In expanding the production of any good,
first employ those resources with the
lowest opportunity cost and only
afterward turn to resources with higher
opportunity cost.
Nov. 25th, 2002
ECON 1 – Section 22 – Page 27
„
GSI: R. Estopina
„
<file>
ECON 1 – Section 22 – Page 29
No, the low-hanging-fruit principle does
not apply. The production possibilities
curve is a straight line in both cases,
implying that as the production of either
commodity increases, its opportunity cost
in terms of the other commodity remains
constant.
Nov. 25th, 2002
ECON 1 – Section 22 – Page 28
GSI: R. Estopina
Problem 3.9 (cont’d)
B) Suppose Inlandia and Outlandia sign
a trade agreement in which each
country would specialize in the
production of either oil or oranges.
Which country should specialize in
which commodity?
Nov. 25th, 2002
GSI: R. Estopina
A) Does the low-hanging-fruit principle
apply in either of these 2 economies?
Problem 3.9 (cont’d)
„
ECON 1 – Section 22 – Page 26
Problem 3.9 (cont’d)
Recall low-hanging-fruit principle:
„
Inlandia can produce up to 10M tons of oranges per
week or 5M barrels of oil or any combination of oil
and oranges along a straight-line PPC linking those 2
points.
Outlandia can produce up to 50M tons of oranges
per week or 1M barrels of oil or any combination of
oil and oranges along a straight-line PPC linking
those 2 points.
„
GSI: R. Estopina
„
Again:
„
„
„
„
OCOranges = Loss in Oil / Gain in Oranges
OCOil = Loss in Oranges / Gain in Oil
Since the opportunity cost of a barrel of oil is 2
tons of oranges in Inlandia and 50 tons of
oranges in Outlandia, Inlandia should produce
oil.
Since the opportunity cost of a ton of oranges is
0.5 of a barrel of oil in Inlandia, and 1/50 of a
barrel of oil in Outlandia, Outlandia should
produce oranges.
Nov. 25th, 2002
ECON 1 – Section 22 – Page 30
GSI: R. Estopina
5
Problem 3.9 (Conclusion)
„
C) What are the maximum and minimum prices
that can prevail on the market for a ton of
oranges, in terms of barrels of oil?
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In the absence of trade, Inlandia pays an opportunity
cost of 0.5 of a barrel of oil for each ton of its own
domestically produced oranges. Therefore, Inlandia
will not offer a price above 0.5 of a barrel of oil for
each ton of imported oranges.
Similarly, Outlandia will not be willing to accept a
price below 1/50 of a barrel of oil for each ton of its
exported oranges, since that is the price that oranges
would trade for at home.
So the international price for a ton of oranges will lie
somewhere between 1/50 of a barrel of oil and half a
barrel of oil.
Nov. 25th, 2002
ECON 1 – Section 22 – Page 31
GSI: R. Estopina
Problems for next sections !!!
„
For next section:
„
Chapter 28: Problems 5, 6.
Remember: This is not mandatory.
„ It won’t be graded. Only for those of
you that need improvement in Exam
grades.
„
Nov. 25th, 2002
ECON 1 – Section 22 – Page 32
GSI: R. Estopina
Next class
„
Next Class:
„
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Section 23 – Monday, Dec 2nd
No class/section next Wednesday !!!
If you want more practice, work on Next
Sections Problems.
Read ch. 28 & 29.
You can download handouts this afternoon.
Thank you for coming on time !!!
Enjoy the long weekend !!.
Nov. 25th, 2002
<file>
ECON 1 – Section 22 – Page 33
GSI: R. Estopina
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