Marta Lis

TASK 1 BLOCK 1 Answer the following 7 questions and solve the exercise:

QUESTIONS

1. Why is the concept of scarcity the key point to explain the economic
problem?

The underlying economic issue of scarcity is that the world has limited or
scarce resources to fulfill apparently unlimited wants. This fact compels
people to make choices about how to distribute resources in the most
effective and possible way in order to know as many of their priorities as
feasible.

2. What is the difference between optimization and maximization or

minimization?

The distinction between optimization and maximization as nouns is that

optimization is the design and execution of a system or process to make it
as excellent as possible in some specified meaning, whereas maximizing
is the act of increasing something to its maximum value or extent.

3. Why is the shape of the economy's production possibility curve

concave?

Because of the increasing opportunity cost, the Production Possibility

Curve (PPC) is concave to the origin. As we progress down the PPC, more
and more units of other goods must be sacrificed in order to create each
extra unit of one good. As a result, PPC has a concave form.

4. What’s the meaning of a straight line PPF?

If the opportunity cost is constant, the line will be straight.

5. When is PPF matching CPF?

A self-sufficient economy has the same PPF and CPF when there is no
specialization.

6. When is the CPF higher than the PPF?

A higher CPF is justified by specialization and trade.

7. When the criterion of comparative advantage does not work to justify

the specialization of a country or an individual?

When the opportunity costs are equal

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EXERCISE

INDIA CHINA
FOOD (one unit) 16 hours 20 hours
OUTFIT (one 20 hours 24 hours
unit)

Suppose that India and China both make Food and Outfit.

The table above lists the production cost in terms of hours of labour to produce one
unit for each product, and let’s assume that the endowment for each country is of
240 hours.

Answer the following questions based upon the information provided.

a) Which country has the absolute advantage in producing Food? Please

explain why?

INDIA CHINA
FOOD 15 u 12 u

India has the absolute advantage in production of food. As we can see in the
table, India produces food in less time than China and with the same
production hours (240) India produces more units than China.

b) Which country has the absolute advantage in producing Outfit? Please

explain why?

INDIA CHINA
OUTFIT 12 u 10 u

India has the absolute advantage in the production of Outfit. As we can see
in the table, India produces the Outfit in less hours than China and with the
same time of production (240 hours) India manufactures more units than
China.

c) How many Food’s is India giving up by producing one unit of Outfit?

240-20= 220 hours

220/16= 13,75

15-13,75= 1,25

By producing one unit of Outfit, India is giving up 1,25 units of Food.

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d) How many Outfit’s is India giving up by producing one unit of Food?

240-16= 224 hours

224/20= 11,2

12-11,2= 0,8

By producing one unit of Food, India is giving up 0,8 unit of Outfit.

e) What is China’s opportunity cost of producing one unit of Outfit?

INDIA CHINA
1.U. of FOOD 0,8 u of outfit 0,83 u of outfit
1.U. of OUTFIT 1,25 u of food 1,2 u of food

China’s opportunity cost of producing one unit of Outfit is 1,2 units of Food.

f) What is China’s opportunity cost of producing one unit of Food?

INDIA CHINA
1.U. of FOOD 0,8 u of outfit 0,83 u of outfit
1.U. of OUTFIT 1,25 u of food 1,2 u of food

China’s opportunity cost of producing one unit of Food is 0,83 units of Outfit.

g) Which country has the comparative advantage in producing Food?

Please explain why.

Someone has a comparative advantage when he has a lower opportunity

cost than the other person. In this case, China has the comparative
advantage in producing Food, due that this country has a lower opportunity
cost than India.

h) Which country has the comparative advantage in producing Outfit?

Please explain why.

In this case India has the comparative advantage in producing Outfit, due
that it has a lower opportunity cost than China.

i) Looking at these two countries, explain why one country can have an
absolute advantage in producing something but not have a
comparative advantage.

Because comparative advantage exists when a country can produce goods

at a lower opportunity cost (not necessarily at a greater volume) compared
to other countries. And absolute advantage exists when a country is simply
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the best (most efficient) in producing a product or service. They look for
different things.

j) Modify the above table just changing one number to explain the case
where the comparative advantage doesn’t work.

INDIA CHINA
FOOD (one unit) 24 hours 20 hours
OUTFIT (one 20 hours 24 hours
unit)