Chapter 3, Problem 1SQ

(a)

To determine

Country with absolute advantage in the production of cheese and in cars.

Explanation of Solution

The absolute advantage is the ability to produce more quantity than the opponent countries in the economy. In this case, France can produce 2kg of cheese, whereas Germany can only produce 1 kg, which means that France has absolute advantage in producing cheese. In the case of cars, France can produce 0.25 cars per hour, whereas Germany can produce 0.50 per hour, which means that the output per hour is higher in Germany. This indicates that Germany has absolute advantage in the production of cars.

Economics Concept Introduction

Absolute advantage: Absolute advantage is the ability to produce more quantity than the competent economies in the market.

(b)

To determine

Relative price of cheese in two countries.

Explanation of Solution

The output per hour in France is 2kg of cheese or 0.25 cars. Thus, dividing the quantity of cars with cheese can provide the relative price of cheese in France. This means that when France does not trade cheese, the relative price of the absolute advantaged product will be one-eighth of that of the car. In the case of Germany, the output is either 1 kg of cheese or 0.5 cars, which means that the relative price of cheese will be half of that of the car.

(c)

To determine

Opportunity cost of cheese in two countries.

Explanation of Solution

The opportunity cost is the next best alternative that is foregone while making the decision between the available choices in the economy. The opportunity cost can be calculated by dividing the output of the car lost with the output of cheese gained. This will be similar to the relative price of cheese, which means one-eighth of the cars in France and half of cars in Germany.

(d)

To determine

Comparative advantage in cheese and cars in two countries.

Explanation of Solution

Comparative advantage is the ability of the economy to produce the output at the least opportunity cost of production. The opportunity cost of producing cheese is lower in France as it has an opportunity cost of one-eighth of the cars compared to half in Germany. The opportunity cost of a car can be calculated by dividing the units of cheese lost with the units of cars gained. It is 2 in Germany, whereas it is 8 in France, which means that Germany has the lowest opportunity cost of producing cars.

(e)

To determine

Upper and lower bounds of trade prices for cheese.

Explanation of Solution

The relative prices of the two countries act as the upper and lower bounds of the trade price of cheese. The relative price of cheese is one-eighth in France and one-half in Germany, which means that the upper bound will be one-half and the lower bound will be one-eighth. The actual price for cheese will settle between these two values.

(f)

To determine

PPC curve for France.

Explanation of Solution

PPC is the production possibility curve, which is the graphical representation of all the combinations of two goods that the economy can produce using the resources and the technology efficiently. The price of cheese is one-eighth of the car, and thus, when no car is produced, France can make 16 units of cheese in 8 hours, whereas if it goes for cars and not cheese, only 2 cars can be produced. Thus, the PPC curve for France will stretch from 16 on the vertical axis to 2 in the horizontal axis. When France engages in the trade, it increases the quantity of cars available along with cheese for both countries, which enables that the two consume beyond the PPC. This can be illustrated as follows: