Calculate opportunity cost of production

ECON251 – Microeconomics

Summer 2020

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Instructions:

The following assignment is an individual work. It should be solved and submitted on moodle. Answer clearly and show your steps.

Question 1 (40 points)

1. Trade is beneficial for trading countries if it is based on:

a) absolute advantage. b) comparative advantage. c) production costs. d) relative dollar prices.

2. If a country is producing a combination of goods on its production possibilities frontier

a) it must be employing all available resources. b) it must be using only part of available resources. c) it is using all the available natural resources but may not be using all

available labor resources. d) None of the above

3. The slope of the production possibility frontier shows

a) how inputs must be changed to keep them fully employed. b) the technically efficient combinations of the two goods. c) how demanders are willing to trade one good for another. d) the opportunity cost of one good in terms of the other.

4. Absolute advantage is found by

a) comparing opportunity costs. b) calculating the dollar cost of production. c) comparing the productivity of one nation to that of another. d) first determining which country has a comparative advantage.

5. If a country is producing a combination of goods on its production possibilities frontier. This combination is:

a) feasible but not efficient. b) efficient but not feasible. c) feasible and efficient d) neither feasible nor efficient

Problem 2 (60 points)

In the ancient country of Roma only two goods, spaghetti and meatballs are produced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce either 30 pounds of spaghetti and no meatballs, 50 pounds of meatballs and no spaghetti, or any combination in between. The Frivoli, by themselves, each month can produce 40 pounds of spaghetti and no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in between.

a) Draw two PPF diagrams: one for Tivoli and another for Frivoli. Put Spaghetti on vertical axis and Meatballs on the horizontal axis. Assume PPFs are straight lines. (15 points)

b) Which tribe has absolute advantage in Spaghetti production? Meatballs production? Explain your answer. (10 points)

c) Calculate opportunity cost of production of one Spaghetti and opportunity cost of production of one meatball for both tribes. (15 points)

d) Define who has comparative advantage in production of Spaghetti and in Meatballs. Explain you answer (10 points)