ECON101 Tutorial 2 Questions

Chapter 3
Question 4
Suppose that there are 10 million workers in Canada and that each of these workers can produce
either 2 cars or 30 bushels of wheat in a year.
a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of
producing a bushel of wheat in Canada? Explain the relationship between the opportunity
costs of the two goods.
b. Draw Canadas production possibilities frontier. If Canada chooses to consume 10 million
cars, how much wheat can it consume without trade? Label this point on the production
possibilities frontier.
c. Now suppose the United States offers to buy 10 million cars from Canada in exchange for
20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much
wheat does this deal allow Canada to consume? Label this point on your diagram. Should
Canada accept this deal?
Solution
a. Because a Canadian worker can make either two cars a year or 30 bushels of
wheat, the opportunity cost of a car is 15 bushels of wheat. Similarly, the opportunity
cost of a bushel of wheat is 1/15 of a car. The opportunity costs are the reciprocals of
each other.
b. See Figure 1. If all ten million workers produce two cars each, they produce a total
of 20 million cars, which is the vertical intercept of the production possibilities
frontier. If all ten million workers produce 30 bushels of wheat each, they produce a
total of 300 million bushels, which is the horizontal intercept of the production
possibilities frontier. Because the trade-off between cars and wheat is always the same,
the production possibilities frontier is a straight line.
If Canada chooses to consume ten million cars, it will need five million workers
devoted to car production. That leaves five million workers to produce wheat, who will
produce a total of 150 million bushels (five million workers times 30 bushels per
worker). This is shown as point A on Figure 1.
c.
If the United States buys 10 million cars from Canada and Canada continues to
consume 10 million cars, then Canada will need to produce a total of 20 million cars.
So Canada will be producing at the vertical intercept of the production possibilities
frontier. However, if Canada gets 20 bushels of wheat per car, it will be able to
consume 200 million bushels of wheat, along with the 10 million cars. This is shown as
point B in the figure. Canada should accept the deal because it gets the same number
of cars and 50 million more bushels of wheat.

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Figure 1

Question 5
England and Scotland both produce scones and sweaters. Suppose that an English worker can
produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40
scones per hour or 2 sweaters per hour.
a. Which country has the absolute advantage in the production of each good? Which country
has the comparative advantage?
b. If England and Scotland decide to trade, which commodity will Scotland export to England?
Explain.
c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from
trade? Would England still gain from trade? Explain.
Answer
a. English workers have an absolute advantage over Scottish workers in
producing scones, because English workers produce more scones per hour (50 vs. 40).
Scottish workers have an absolute advantage over English workers in producing
sweaters, because Scottish workers produce more sweaters per hour (2 vs. 1).
Comparative advantage runs the same way. English workers, who have an
opportunity cost of 1/50 sweater per scone (1 sweater per hour divided by 50 scones
per hour), have a comparative advantage in scone production over Scottish workers,
who have an opportunity cost of 1/20 sweater per scone (2 sweaters per hour divided
by 40 scones per hour). Scottish workers, who have an opportunity cost of 20 scones
per sweater (40 scones per hour divided by 2 sweaters per hour), have a comparative
advantage in sweater production over English workers, who have an opportunity cost
of 50 scones per sweater (50 scones per hour divided by 1 sweater per hour).

2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

b.
If England and Scotland decide to trade, Scotland will produce sweaters and
trade them for scones produced in England. A trade with a price between 20 and 50
scones per sweater will benefit both countries, as they will be getting the traded good
at a lower price than their opportunity cost of producing the good in their own
country.
c.
Even if a Scottish worker produced just one sweater per hour, the countries
would still gain from trade, because Scotland would still have a comparative
advantage in producing sweaters. Its opportunity cost for sweaters would be higher
than before (40 scones per sweater, instead of 20 scones per sweater before). But there
are still gains from trade because England has a higher opportunity cost (50 scones per
sweater).
Question 10
The U.S. exports corn and aircraft to the rest of the world, and it imports oil and clothing
from the rest of the world. Do you think this pattern of trade is consistent with the principle
of comparative advantage? Why or why not?
Answer
This pattern of trade is consistent with the principle of comparative advantage. If the
United States exports corn and aircraft, it must have a comparative advantage in the
production of these goods. Because it imports oil and clothing, the United States must
have a comparative disadvantage in the production of these items.
Chapter 9
Question 1
Mexico represents a small part of the world orange market.
a. Draw a diagram depicting the equilibrium in the Mexican orange market without
international trade. Identify the equilibrium price, equilibrium quantity, consumer
surplus and producer surplus.
b. Suppose that the world orange price is below the Mexican price before trade and that the
Mexican orange market is now opened to trade. Identify the new equilibrium price,
quantity consumed, quantity produced domestically, and quantity imported. Also show
the change in the surplus of domestic consumers and producers. Has total surplus
increased or decreased?

2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Answer
1. a. In Figure 3, with no international trade the equilibrium price is P1 and the
equilibrium quantity is Q1. Consumer surplus is area A and producer surplus is area
B + C, so total surplus is A + B + C.
Figure 3

b. When the Mexican orange market is opened to trade, the new equilibrium
price is PW, the quantity consumed is QD, the quantity produced domestically
is QS, and the quantity imported is QD QS. Consumer surplus increases
from A to A + B + D + E. Producer surplus decreases from B + C to C. Total
surplus changes from A + B + C to A + B + C+ D + E, an increase of D + E.
Question 3
Suppose that Congress imposes a tariff on imported autos to protect the U.S. auto industry
from foreign competition. Assuming that the U.S. is a price taker in the world auto market,
show the following on a diagram: the change in the quantity of imports, the loss to U.S.
consumers, the gain to U.S. manufacturers, government revenue, and the deadweight loss
associated with the tariff. Show how the loss to consumers is distributed between a gain to
domestic producers, revenue for the government, and a deadweight loss. Use your diagram
to identify these changes.
Answer
3. The impact of a tariff on imported autos is shown in Figure 6. Without the tariff, the price of
an auto is PW, the quantity produced in the United States is Q1 S, and the quantity purchased
in the United States is Q1D. The United States imports Q1D Q1S autos. The imposition of the
tariff raises the price of autos to PW + t, causing an increase in quantity supplied by U.S.
D
S
producers to Q 2 and a decline in the quantity demanded to Q 2 . This reduces the number of
D
S
imports to Q2 Q2 . The table shows the areas of consumer surplus, producer surplus,
government revenue, and total surplus both before and after the imposition of the tariff.
Because consumer surplus declines by C + D + E + F while producer surplus rises by C and
government revenue rises by E, the deadweight loss is D + F. The loss of consumer surplus
in the amount C + D + E + F is split up as follows: C goes to producers, E goes to the
government, and D + F is deadweight loss.
2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 6
Consumer Surplus
Producer Surplus
Government Revenue
Total Surplus

Before Tariff
A+B+C+D+E+F
G
0
A+B+C+D+E+F+G

After Tariff
A+B
C+G
E
A+B+C+E+G

CHANGE
(C + D + E + F)
+C
+E
(D + F)

Question 7
If tariffs reduce total surplus, why would a government impose them? (Think about
who gains and who loses from a tariff.)
Answer
7. Tariffs harm domestic consumers while helping domestic producers. Because
there are fewer producers, producers are better able to organize than consumers.
Producers may also have more funds to spend on lobbying. Thus, it is likely that
producers are better able to represent their interests and influence international trade
policy.