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Hints for Unit 3 Assignment

Remember that the Unit 3 Assignment includes work from both Units 2 and Unit 3.

Question 1 is from Unit 2 Question 1a is asking whether or not that level of production can be achieved, given the existing PPF

curve, and asks you to explain W HY. Remember what I had people type in during the seminar about resources?

Question 1b is asking you to compute the marginal opportunity cost of one 200 pound batch of corn (800lbs to 1,000lbs) in pounds of poultry that must be given up to get this batch of corn.

Question 1c is asking you to compute the marginal opportunity cost of a similar 200 pound batch of corn (200lbs to 400lbs) in pounds of poultry that must be given up to get this batch of corn.

- Remember from the Unit 2 Seminar:

Remember what I had everyone type about resources during the Seminar.

- Also remember how to compute marginal opportunity costs.

o after catching the FIRST batch of 20 fish Tom would still have enough TIME to get 25

coconuts

o after catching the SECOND batch of 20 fish Tome would not have any time left to get

coconuts, so he would have 0 coconuts.

o The marginal opportunity cost of the SECOND batch of 20 fish was that Tom had to

give up ALL of the remaining 25 coconuts because Tom no longer had time to get them.

Question 1d asks why these two answers are different and what that implies about the SHAPE of the

PPF curve.

Go back and re-listen to the Unit 2 Seminar for a full explanation. Remember the things that I ask you

to type in the chat that night during the seminar.

- Remember that the best resources for producing one thing are used first. If more output of that

thing is needed, resources that are not as good must be used, therefore increasing the

Marginal Opportunity Costs of the additional output.

o If the FIRST batch of 20 fish had a marginal opportunity cost of 5 coconuts, and the

SECOND batch of 20 fish had a marginal opportunity cost of 25 coconuts, what is

happening to the marginal opportunity costs of fish? Are the marginal opportunity costs

increasing, staying the same, or decreasing?

o If Marginal Opportunity costs of additional batches of fish are increasing, what does this

imply about the shape of the Production Possibility Frontier curve? (Remember what I

had everyone type during the seminar).

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Questions 2 and 3 deal with determining who has the absolute advantage and who has the

comparative advantage for different products and in different situations. - Absolute Advantage has nothing to do with world trade. Absolute advantage only indicates who

could produce the most of something, but not necessarily at the lowest marginal opportunity cost. - Comparative advantage means who can produce the item for the LOW EST marginal opportunity

cost, and is relevant in world trade. - Knowing who has the comparative advantage (knowing what they trade) says nothing about who

has the absolute advantage.

The following are sample calculations to determine the marginal opportunity cost, in order to determine who has the comparative advantage in a particular situation. The simplified production

possibility frontier graph shows that Tom can produce a maximum of either 30 coconuts, or 40 fish and Hank can produce a maximum of either 20 coconuts, or 10 fish.

How many coconuts does ONE fish cost for Tom? ONE fish costs = 30 coconuts / 40 fish = 3/4 of a coconut = 0.75 coconuts

And how many fish does ONE coconut cost for Tom? ONE coconut costs = 40 fish / 30 coconuts = 1 and 1/3- fish = 1.33 fish

And…

How many coconuts does ONE fish cost for Hank? ONE fish costs = 20 coconuts / 10 fish = 2 coconuts

And how many fish does ONE coconut cost for Hank? ONE coconut costs = 10 fish / 20 coconuts = 1/2 of a fish = 0.50 fish

Item Tom’s Opportunity Cost

Hank’s Opportunity Cost

One fish 3/4 coconut 2 coconuts

One coconut 4/3 fish 1/2 fish

Tom has the ABSOLUTE advantage in both fish and coconuts because Tom can produce MORE of

each compared to Hank.

Although Tom can produce more fish than Hank, Tom’s marginal opportunity cost of each fish is only

0.75 coconuts, compared to Hanks marginal opportunity cost of producing a fish, which is two

coconuts. Therefore, Tom has the comparative advantage in producing fish.

Although Tom can produce more coconuts than Hank, Tom’s marginal opportunity cost of each

coconut is 1.33 fish, compared to Hanks marginal opportunity cost of producing a coconut, which is

0.50 fish. Therefore, Hank has the comparative advantage in producing coconuts.

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Question 4 is from Unit 3 and is a straight supply and demand question.

Go back and re-listen to the Unit 3 Seminar.

For questions 4 b-e, pay particular attention to the example in the seminar of selling to the one group

of consumers and then suddenly also being able to sell to an additional group of consumers. The

assignment question is very similar.

See part 8 and part 9 of the supply and demand videos under the Video icon that is under the

Unit 3 Reading.

Question 4 is like the example in the seminar. You add the original country's demand to the new

country's demand to get a NEW total demand. Then, see at what price that NEW total amount

demanded is equal to the same amount that suppliers are willing to supply. That is the new price.

Then, go back to the original country's demand and see how much they are willing to demand at this

new higher price.

Did you add your references and coversheet information to the template with your answers?