1. Ben and Louise are colleagues in the Economics Department.

They each have two main

activities – writing research papers and preparing lectures. For Ben, it takes five hours to write
a research paper and two hours to prepare a lecture. For Louise, it takes 10 hours to write a
research paper and two hours to prepare a lecture. Ben and Louise each have 40 hours per
week to spend on their work for the Economics Department. Who has an absolute advantage
in writing research papers and who has an absolute advantage in preparing lectures? Who has
a comparative advantage in writing research papers? What about preparing lectures?

When it comes to preparing a lecture and writing a research paper in absolute advantage, Ben is
most likely to have the advantage because he only consumes five hours to make a research paper.
Unlike Louise, who takes 10 hours to write a research paper. But in terms of comparative advantage,
Louise has an advantage in making or preparing a lecture than creating a research paper. If Louise
prepares the lecture while Ben works on the research paper, the future effect of doing so will be more
than fair.

2. Assume that in one hour, John can either write two assignments or mow one lawn, and
Natasha can either write two assignments or mow three lawns. Now say whether each
statement below is correct or incorrect:
a. There will be no gains from trade if John and Natasha specialize in production activities.
INCORRECT
b. To achieve gains from trade, John should specialize in writing assignments and
Natasha should specialize in mowing lawns. CORRECT
c. John has a comparative advantage in producing the same good as Natasha.
CORRECT
3. Suppose that Australia, New Zealand and India can each produce two goods: steel and wool.
The production of each good requires only one input: labour. In Australia, a worker can
produce either six bales of wool in one hour or 3 tonnes of steel in one hour. In New Zealand,
a worker can produce either one bale of wool in one hour or 2 tonnes of steel in one hour. In
India, a worker can produce either three bales of wool in one hour or 2 tonnes of steel in one
hour. For each pair of countries, which country has a comparative advantage in the production
of steel? How about wool?

New Zealand has a comparative advantage in the manufacture of steel due to its ability to create 3
tonnes of steel in just one hour, but Australia has a greater comparative advantage in the production
of wool.