ECON 2103

Tutorial 2

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Quick Quiz 2.2
The circular-flow diagram illustrates that, in markets
for the factors of production,
a. Households are sellers, and firms are buyers
b. Households are buyers, and firms are sellers
c. Households and firms are both buyers
d. Households and firms are both sellers

Answer: a

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Quick Quiz 2.3
A point inside the production possibilities frontier is
a. Efficient but not feasible
b. Feasible but not efficient
c. Both efficient and feasible
d. Neither efficient nor feasible

Answer: b

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Question for Review 2.5
• Draw and explain a production possibilities frontier
for an economy that produces milk and cookies.
• What happens to this frontier if a disease kills half
of the economy’s cows?

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Question for Review 2.5
If a disease kills half of the economy's cow
population, less milk production is possible, so the
PPF shifts inward from PPF1 to PPF2
If the economy produces all cookies, it does not need
any cows and production is unaffected. But if the
economy produces any milk at all, then there will be
less production possible after the disease hits.

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Question for Review 2.7
Use a production possibilities frontier to describe the
idea of efficiency.

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Question for Review 2.7
• An outcome is efficient if the economy is getting all it
can from the scarce resources it has available. In terms
of the production possibilities frontier, an efficient
point is a point on the frontier, such as point A
• When the economy is using its resources efficiently, it
cannot increase the production of one good without
reducing the production of the other
• A point inside the frontier, such as point B, is inefficient
since more of one good could be produced without
reducing the production of another good

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Problem 2.1
Draw a circular-flow diagram. Identify the parts of
the model that correspond to the flow of goods and
services and the flow of dollars for each of the
following activities
a. Selena pays a storekeeper $1 for a quart of milk
b. Stuart earns $8 per hour working at a fast-food
restaurant
c. Shanna spends $40 to get a haircut
d. Salma earns $20,000 from her 10 percent
ownership of Acme Industrial

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Problem 2.1

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Quick Quiz 3.1
Before A and B engage in trade, each of them
a. Consumes at a point inside his or her PPF
b. Consumes at a point on his or her PPF
c. Consumes at a point outside his or her PPF
d. Consumes the same amounts of goods as the
other

Answer: b

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Quick Quiz 3.2
After A and B engage in trade, each of them
a. Consumes at a point inside his or her PPF
b. Consumes at a point on his or her PPF
c. Consumes at a point outside his or her PPF
d. Consumes the same amounts of goods as the
other

Answer: c

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Quick Quiz 3.3
In an hour, Mateo can wash 2 cars or mow 1 lawn,
and Sophia can wash 3 cars or mow 1 lawn. Who has
the absolute advantage in car washing, and who has
the absolute advantage in lawn mowing?
a. Mateo in washing, Sophia in mowing
b. Sophia in washing, Mateo in mowing
c. Mateo in washing, neither in mowing
d. Sophia in washing, neither in mowing

Answer: d
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Quick Quiz 3.4
In an hour, Mateo can wash 2 cars or mow 1 lawn, and
Sophia can wash 3 cars or mow 1 lawn. Between Mateo
and Sophia, who has the comparative advantage in car
washing, and who has the comparative advantage in
lawn mowing?
a. Mateo in washing, Sophia in mowing
b. Sophia in washing, Mateo in mowing
c. Mateo in washing, neither in mowing
d. Sophia in washing, neither in mowing

Answer: b
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Quick Quiz 3.7
In the United States
• produce an aircraft takes 10,000 hours of labor
• produce a shirt takes 2 hours of labor
In China
• produce an aircraft takes 40,000 hours of labor
• produce a shirt takes 4 hours of labor

a. China exports aircraft; US exports shirts

b. China exports shirts; US exports aircraft
c. Both nations export shirts
d. There are no gains from trade in this situation

Answer: b

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Quick Quiz 3.8
Kayla can cook dinner in 30 minutes and wash the laundry in
20 minutes. Her roommate takes twice as long to do each
task. How should the roommates allocate the work?
a. Kayla should do more of the cooking based on her
comparative advantage
b. Kayla should do more of the washing based on her
comparative advantage
c. Kayla should do more of the washing based on her
absolute advantage
d. There are no gains from trade in this situation

Answer: d

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Problem 3.5
England and Scotland both produce scones and
sweater. Suppose that an English worker can produce
50 scones per hour or 1 sweater per hour. Suppose
that a Scottish worker can produce 40 scones per
hour or 2 sweaters per hour.
a. Which country has the absolute advantage in the
production of each good? Which country has a
comparative advantage?

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Problem 3.5
• English workers have an absolute advantage over Scottish workers
in producing scones because English workers produce more
scones per hour (50 vs. 40)
• Scottish workers have an absolute advantage over English workers
in producing sweaters because Scottish workers produce more
sweaters per hour (2 vs. 1)
• English workers, who have an opportunity cost of 1/50 sweater
per scone (1 sweater per hour divided by 50 scones per hour),
have a comparative advantage in scone production over Scottish
workers, who have an opportunity cost of 1/20 sweater per scone
(2 sweaters per hour divided by 40 scones per hour)
• Scottish workers, who have an opportunity cost of 20 scones per
sweater (40 scones per hour divided by 2 sweaters per hour),
have a comparative advantage in sweater production over English
workers, who have an opportunity cost of 50 scones per sweater
(50 scones per hour divided by 1 sweater per hour)

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Problem 3.5
b. If England and Scotland decide to trade, which
commodity will Scotland export to England? Explain.

• If England and Scotland decide to trade, Scotland will

produce sweaters and export them to England in
exchange for scones
• A trade with a price between 20 and 50 scones per
sweater will benefit both countries, as they will be
getting the traded good at a lower price than their
opportunity cost of producing the good in their own
countries

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Problem 3.5
c. If a Scottish worker could produce only 1 sweater per
hour, would Scotland still gain from trade? Would
England still gain from trade?
• Even if a Scottish worker produced just one sweater per
hour, the countries would still gain from trade, because
Scotland would still have a comparative advantage in
producing sweaters.
• Its opportunity cost for sweaters would be higher than
before (40 scones per sweater, instead of 20 scones per
sweater before). But there are still gains from trade
because England has a higher opportunity cost (50
scones per sweater)

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