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ECON1210 Tutorial 2
Xiaokang SHENG
Email: csxk@hku.hk Office: KK1026

Sep 17, 2020

Ch 2. Power of Trade and Comparative Advantage

1. Comparative Advantage

1.1 Given time

Time required by each to complete each type of job:
Painting Roofing
Paul 300 hrs 400 hrs
Ron 200 hrs 100 hrs

Remember: The smaller, the better!

OC Painting OC Roofing
Paul 300/400 = 400/300 =
0.75 roofing 1.33 painting
Ron 200/100 = 100/200 =
2 roofing 0.5 painting

Comparative Advantage:
An agent who has lower opportunity cost of producing that good.
Paul has a comparative advantage over Ron at painting, which means that he is
relatively more efficient at painting than Ron is.

Q1. The following tables shows the number of hours needed for Vivian and Veronica
to bake a dozen of egg tarts or a dozen of muffins.

We can conclude that ________ has/have comparative advantage in making egg tarts
and _________ has/have comparative advantage in making muffins.
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1.2 Given quantity
Units produced per day:
Sandwiches Hamburgers
Chris 25 60
Jenny 10 50

Remember: The larger, the better!

OC Sandwiches OC Hamburgers
Chris 60/25 = 2.4 H 25/60 = 0.42 S
Jenny 50/10 = 5 H 10/50 = 0.2 S

• Chris will specialize in producing sandwich and Jenny will specialize in producing
hamburger;
• Chris and Jenny will only agree to trade when the ToT is mutually beneficial. So,
the range of ToT lies between 2.4 and 5 units of hamburgers per sandwich.

(What if the ToT is larger than 5 or smaller than 2.4?)

Q2. Suppose that Joan and Tanya both produce jacket and shoes. In a day, Joan can
produce either 25 jackets or 10 pairs of shoes. In a day, Tanya can produce either 60
jackets or 20 pairs shoes. Assume that Joan and Tanya decide to COMPLETELY
specialize in the production of one type of goods and trade with one another. In a day,
Joan will produce __________ jackets and ___________ pairs of shoes, while Tanya
will produce ________ jackets and _________ pairs of shoes.

Q3. Ann can produce 10 square yards of shelter or 10 pounds of food per week. Ben
can produce 6 square yards of shelter or 3 pounds of food per week. Suppose the two-
person economy that consists of Ann and Ben can now trade in the world market, where
the price per square yard of shelter is $2 and the price per pound of food is $3. Then
they will produce _____ square yards of shelter and _____ pounds of food per week.

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 2. PPC & CPC

PPC: Flatter, lower O.C. of producing X; steeper, higher O.C. of producing X (lower
O.C. of producing Y).

• Closed-economy: PPC=CPC;
• Open-economy: We can BENEFIT from it!

Suppose A(x0, y0), we have pxx0+pyy0=I.

Actually, any consumption bundle (x, y) must satisfy pxx+pyy=I.
𝐼 𝑝𝑥
Rearrange, we get 𝑦= − 𝑥.
𝑝𝑦 𝑝𝑦

Q4a. The following graph shows the Neverland’s production possibilities. Neverland
is a small nation. Suppose the world price of Tea is $2 per kg and the world price of
Banana is $1 per kg, and Neverland decides to open up to the world market and trade.
How many kgs of banana could they consume if they were to consume 10 kgs of tea?

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Q4b. Suppose the world price of Tea is $1 per kg and the world price of Banana is $2
per kg. How many kgs of banana could they consume if they were to consume 10 kgs
of tea?

Q4c. Suppose the world price of Tea is $4 per kg and the world price of Banana is $1
per kg. How many kgs of banana could they consume if they were to consume 10 kgs
of tea?

Q5. Is the kink point always optimal?

Hint:
In a two-person economy, slopes of their PPCs are -a and -b respectively (0<a<b):
px
①0< < a, __________;
py
px
②a< < b, __________;
py
px
③ > b, __________.
py

--END--

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