Problem Solving Process in Economics - Assignment Example

Rancher’s opportunity cost of producing 1 pound of meat is 1/8 pound of potatoes illustrates the ease at which a farmer can produce meat instead of potatoes. Rancher has a comparative advantage in producing meat instead of producing potatoes (Mankiw, 52).

Question 3

1. a) Production opportunities for 

Months needed to produce one car

Months needed to produce a tone of grains

number of cars produced in 12 months

Quantity of grains produced in 12 months

Car 

Grains (tons)

Cars 

Grains

American 

3 months/car

1.2 months/ton

4

10

Japanese 

3 months/car

2.4 months/ton

4

5

1. b) Production possibility frontier of American in a year

Production possibility frontier for Japanese in a year

1. c) In the USA, the opportunity cost for producing a car is 2.5 tons of grains while that of producing 5 tons of grains is 2 cars. 

In Japan, the opportunity cost of producing a car is 1.25 tons of grains while that of producing 5 tones of grains is 4 cars.  

Opportunity costs

Producing 1 car

Producing 5 tons of grains

America

2.5 tns of grains

2 cars

Japan 

1.25 tns of grains

4 cars

1. d) Production of grains in America is an absolute advantage. This is because it can produce more grains within a year as compared to Japan which produces only 5 tons grains in a year (Mankiw, 52).
2. e) Japan has a comparative advantage in producing cars while American has a comparative advantage in producing grains. 
3. f) Without trade America produces 200m cars and 500 m tons of grains while Japan produces 200 m cars and 250 m tons of grains. 
4. g) In a situation of trade, Japan will have to consume 4 cars from America when producing 5 tones of grains. On the other hand, America may consume 4 cars from Japan while it produces 10 tons of grains. 

Question 4

1. a)

Opportunity cost

Pat: 4 hours brewing a gallon of beer

Kris: 6 hours brewing a gallon of beer

Absolute advantage

Pat’s production of pizza is an absolute advantage since he can only use 2 hours to make a pizza compared to Kris who uses 4 hours to produce a single pizza.