Question

AP Macro Topic 1.3 Comparative Advantage and Trade Part 1 - Mastering Skills- Answer the following questions to verify that you fully understand opportunity cost, absolute advantage, comparative advantage, and terms of trade. Units produced per hour Burgers Pizzas Bob 30 5 Frank 16 4 1. Is this an output problem or an input problem? 2. What is Bob’s opportunity cost of producing 1 pizza? 3. What is Frank’s opportunity cost of producing 1 burger? 4. What is Bob’s opportunity cost of producing 1 burger? 5. What is Frank’s opportunity cost of producing 1 pizza? 6. Who has the absolute advantage in producing burgers? 7. Who has the absolute advantage in producing pizzas? 8. Who has the comparative advantage in producing burgers? 9. Who has the comparative advantage in producing pizzas? 10. What would acceptable terms of trade be between Bob and Frank? Hours need

Answer 1

Answer:

1. It is an input problem (time).

2. Bob's opportunity cost of producing 1 pizza:

= 6 (12/2) burgers that it could have produced using 12 minutes it used to produce 1 pizza.

3. Frank's opportunity cost of producing 1 burger:

= 0.25 (3.75/15) pizzas that it could have produced using 3.75 minutes to produce 1 burger.

4. Bob's opportunity cost of producing 1 burger:

= 0.17 (2/12) pizzas that it could have produced using 2 minutes to produce 1 burger.

5. Frank's opportunity cost of producing 1 pizza:

= 4 burgers (15/3.75) that it could have produced using 15 minutes to produce 1 pizza.

6. Bob has the absolute advantage in producing burgers.  It produces 30 burgers in 1 hour than Frank.

7. Bob has the absolute advantage in producing pizzas.  It produces 5 pizzas in 1 hour than Frank.

8. Bob has the comparative advantage in producing burgers.  It uses 2 minutes to produce 1 burger instead of Frank's 3.75 minutes.

9. Bob has the comparative advantage in producing pizzas.  It uses 12 minutes to produce 1 pizza instead of Frank's 15 minutes.

10.  The acceptable terms of trade would be for Bob to devote 2 hours in producing 60 burgers and selling to Frank while Frank produces 8 pizzas using 2 hours and selling to Bob.  But, since Bob has absolute and comparable advantage over Frank in the production of the two items, it seems that Frank should allow Bob to produce them, while it devotes its hours in producing another product or service where it has comparative advantage.

Explanation:

a) Data and Calculations:

Units produced per hour

                       Burgers    Pizzas

Bob                      30           5

Frank                   16            4

Minutes per unit:

Bob                     2            12

Frank                  3.75       15