ECO1050 – Specialization and Trade Assignment Worksheet

Specialization and Trade Assignment Worksheet
Directions
Use the following information to
answer the questions below.
To create the graph, or graphs, for
this assignment, use Microsoft Excel or the drawing tool in Microsoft Word.
Copy and paste the graph you create into this worksheet.
Microeconomic Problem
Mary produces both hats and apple
pies:
·
If Mary uses all her resources to produce hats, she
can produce 48 hats an hour.
·
If she uses all her resources to produce apple
pies, she can make 24 apple pies an hour.
Bill produces both hats and apple
pies.
·
If Bill uses all his resources to produce hats,
he can produce 24 hats an hour.
·
If he uses all his resources to produce apple
pies, he can make 48 apple pies an hour.
To complete this assignment, you
must answer all of the following questions and complete all of the following
activities:
1.
Construct
Mary’s production possibilities frontier and Bill’s production possibilities
frontier. Plot hats on the vertical axis.

2.
What is
Mary’s opportunity cost of producing one apple pie?

3.
What is
Mary’s opportunity cost of producing one hat?

4.
What is
Bill’s opportunity cost of producing one apple pie?

5.
What is
Bill’s opportunity cost of producing one hat?

6.
In
which of the two activities does Mary have a comparative advantage? In which of
the two activities does Bill have a comparative advantage? Explain your
reasoning.

7.
Suppose
Mary and Bill are each producing 16 apple pies and 16 hats. Indicate this point
on your production possibilities diagram.

8.
Let
Mary and Bill specialize in what they each have a comparative advantage in.
Indicate these two points on your production possibilities diagram. What has
happened to the total amount of hats and apple pies being produced? Explain why
this happened.

9.
Assume that both parties specialize in producing
the good in which they have a comparative advantage. If Mary and Bill are willing to trade at the rate of one hat for one
apple pie, and make a trade of 24 hats for 24 apple pies, demonstrate on your
production possibilities diagram that both Mary and Bill can get outside of
their individual production possibilities frontier. Why does this mean that
both Mary and Bill are better off?

10. Use Mary’s opportunity costs and Bill’s
opportunity costs to explain why the terms of trade of one hat for one apple
pie was a good terms of trade for both of them.

11. Assume
that both parties specialize in producing the good in which they have a
comparative advantage. Would two hats
for one apple pie be a good terms of trade for both Mary and Bill? Explain why
or why not.

12. Assume
that both parties specialize in producing the good in which they have a
comparative advantage. Use Mary’s
opportunity costs and Bill’s opportunity costs to find a range for the terms of
trade that would be good for both Mary and Bill.

13. If Mary and Bill were
Nation A and Nation B instead, the same principles of comparative advantage,
specialization, and the benefits of trade would apply. If nations
specialize in an area of comparative advantage and then trade with other nations
who have specialized in areas of their comparative advantage, what will happen
to the wealth of the trading nations? What could happen to the standard of
living of the citizens of the nations? Why?

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