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Chapter 2. Chapter 2

Work It Out
Chapter 2
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Answer the following questions using the information given in the accompanying table:

Hint: Your answer should be presented as a fraction.
Home Foreign Absolute Advantage
Number of bicycles produced per hour 4 6
Number of snowboards produced per hour 6 8
Comparative advantage ratio of marginal product of labor for snowboards and marginal product of labor for bicycles in home ratio of marginal product of labor for snowboards and marginal product of labor for bicycles in foreign
a. Complete the table for this problem in the same manner as Table 2.2.

Correct. To find the absolute advantage of bicycles, divide the number of bicycles produced per hour in Home by the number of bicycles produced per hour by Foreign. Four divided by six equals 4/6, which can be reduced to 2/3. To find the absolute advantage of snowboards, divide the number of snowboards produced per hour in Home by the number of snowboards produced per hour in Foreign. Six divided by eight equals 6/8, which may be reduced to 3/4.

To find the comparative advantage for each country, divide the Marginal Product of Labor for snowboards ( marginal product of labor for snowboards ) by the Marginal Product of Labor for bicycles ( marginal product of labor for bicycles ). For Home, the marginal product of labor for snowboards is six, and the marginal product of labor for bicycles is four. Six divided by four equals 6/4, which can be reduced to 3/2. For Foreign, the marginal product of labor for snowboards is eight, and the marginal product of labor for bicycles is six. Eight divided by six equals 8/6, which can be reduced to 4/3.
Incorrect. To find the absolute advantage of bicycles, divide the number of bicycles produced per hour in Home by the number of bicycles produced per hour by Foreign. Four divided by six equals 4/6, which can be reduced to 2/3. To find the absolute advantage of snowboards, divide the number of snowboards produced per hour in Home by the number of snowboards produced per hour in Foreign. Six divided by eight equals 6/8, which may be reduced to 3/4.

To find the comparative advantage for each country, divide the Marginal Product of Labor for snowboards marginal product of labor for snowboards by the Marginal Product of Labor for bicycles ( marginal product of labor for bicycles ). For Home, the marginal product of labor for snowboards is six, and the marginal product of labor for bicycles is four. Six divided by four equals 6/4, which can be reduced to 3/2. For Foreign, the marginal product of labor for snowboards is eight, and the marginal product of labor for bicycles is six. Eight divided by six equals 8/6, which can be reduced to 4/3.
Video transcript

Work It Out, Chapter 2, Question 1

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This problem will ask you to complete the table in the same manner as Table 2.2. We’ll need to determine and fill in the missing fields Absolute Advantage and Comparative Advantage.

(Description)
The table is shown. The table consists of 3 columns: Home, Foreign, Absolute Advantage. The table consists of 3 rows: Number of bicycles produced per hour, Number of snowboards produced per hour, Comparative Advantage. The column Home has the following data: 4, 6, the question mark. The column Foreign has the following data: 6, 8, the question mark. The column Absolute Advantage has the following data: the question mark, the question mark, blank.

(Speaker)
Let’s start by determining absolute advantage. To do so, we’ll determine the Home/Foreign ratio for each good. For bicycles, the Home/Foreign ratio is 4 to 6, representing the number of bicycles that Home can produce in one hour divided by the number of bicycles that Foreign can produce in one hour. This can be reduced to 2 to 3.

(Description)
The corresponding data in the row, Number of bicycles produced per hour, is briefly highlighted.

(Speaker)
We can add this to our table.

(Description)
The data 'Home/Foreign Ratio 2 over 3' replaces the question mark in this row.

(Speaker)
For snowboards, the Home/Foreign ratio is 6 to 8 , representing the number of snowboards that Home can produce in one hour divided by the number of snowboards that Foreign can produce in one hour. This can be reduced to 3 to 4 .

(Description)
The corresponding data in the row, Number of snowboards produced per hour, is briefly highlighted.

(Speaker)
We can add this to our table.

(Description)
The data 'Home/Foreign Ratio 3 over 4' replaces the question mark in this row.

(Speaker)
Now let’s determine comparative advantage. Let’s start with Home. To calculate the value for comparative advantage, we’ll divide the Marginal Product of Labor for snowboards (MPLS) by the Marginal Product of Labor for bicycles (MPLB).

(Description)
The corresponding data in the column, Home, is briefly highlighted.

(Speaker)
For Home, the marginal product of labor for snowboards is six, and the marginal product of labor for bicycles is four. Six divided by four equals 6 to 4 , which can be reduced to 3 to 2. Let’s add this to our table.

(Description)
The data 'MPL subscript S divided by MPL subscript B equals three-halves' replaces the question mark in this column.

(Speaker)
Now let’s use the same formula to calculate comparative advantage for Foreign.

(Description)
The corresponding data in the column, Foreign, is briefly highlighted.

(Speaker)
For Foreign, the marginal product of labor for snowboards is eight, and the marginal product of labor for bicycles is six. Eight divided by six equals 8 to 6 , which can be reduced to 4 to 3. Let’s add this to our table.

(Description)
The data 'MPL star subscript S divided by MPL star subscript B equals four-thirds' replaces the question mark in this column.

(Speaker)
Our table is now complete. Congratulations!

b.
Incorrect. Foreign has an absolute advantage in the production of bicycles because it is able to produce more bicycles (6) in an hour than Home (4). Foreign has an absolute advantage in the production of snowboards because it is able to produce more snowboards (8) in an hour than Home (6).
Correct. Foreign has an absolute advantage in the production of bicycles because it is able to produce more bicycles (6) in an hour than Home (4). Foreign has an absolute advantage in the production of snowboards because it is able to produce more snowboards (8) in an hour than Home (6).
Video transcript

Work It Out, Chapter 2, Question 2

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This problem asks you to determine which country has an absolute advantage in the production of bicycles and which country has an absolute advantage in the production of snowboards.

(Description)
The table completed in part a is shown.

(Speaker)
We’re given the number of bicycles and snowboards that workers in Home and Foreign can produce in one hour. We’ll use this information to determine which country has an absolute advantage in the production of bicycles and which country has an absolute advantage in the production of snowboards. To determine absolute advantage, we’ll compare the number of bicycles and snowboards that each country can produce in one hour. Looking at bicycles, we can see that Home can produce four bicycles in one hour, and Foreign can produce six bicycles in one hour. Because Foreign can produce more bicycles than Home in one hour, we can conclude that Foreign has an absolute advantage in the production of bicycles.

(Description)
The row Number of bicycles produced per hour is briefly highlighted.

(Speaker)
Looking at snowboards, we can see that Home can produce six snowboards in one hour, and Foreign can produce eight snowboards in one hour.

(Description)
The row Number of snowboards produced per hour is briefly highlighted.

(Speaker)
Because Foreign can produce more snowboards than Home in one hour, we can conclude that Foreign has an absolute advantage in the production of snowboards. Because Foreign can produce more bicycles per hour than Home, and more snowboards per hour than Home, Foreign has an absolute advantage in the production of both bicycles and snowboards.

(Description)
The first two values in the Foreign column (6 and 8) are highlighted.

c. What is the opportunity cost of bicycles in terms of snowboards in Home? Present your answer as a fraction. %
What is the opportunity cost of bicycles in terms of snowboards in Foreign? %
Correct. The opportunity cost of one bicycle is 3/2 snowboards in Home opportunity cost of one bicycle is 6/4 or 3/2 snowboards in home . The opportunity cost of one bicycle is 4/3 snowboards in Foreign opportunity cost of one bicycle is 8/6 or 4/3 snowboards in foreign . Recall that the opportunity cost should also equal the price of a good, and therefore the relative prices equal the relative marginal products of labor.
Incorrect. The opportunity cost of one bicycle is 3/2 snowboards in Home opportunity cost of one bicycle is 6/4 or 3/2 snowboards in home . The opportunity cost of one bicycle is 4/3 snowboards in Foreign opportunity cost of one bicycle is 8/6 or 4/3 snowboards in foreign . Recall that the opportunity cost should also equal the price of a good, and therefore the relative prices equal the relative marginal products of labor.
Video transcript

Work It Out, Chapter 2, Question 3

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
This question asks you to calculate the opportunity cost of bicycles in terms of snowboards in Home and the opportunity cost of bicycles in terms of snowboards in Foreign. We can use the table we completed in Part a, specifically our comparative advantage calculation, to answer this question.

(Description)
The table from part a is shown.

(Speaker)
The opportunity cost of one bicycle is three-halves, or 1 and a half of snowboards in Home, since the price of bicycles in Home divided by the price of snowboards in home equals the marginal product of labor of snowboards divided by the marginal product of labor of bicycles, which equals six over four which equals three-halves.

(Description)
The value in the column Home and the row Comparative Advantage is, MPL subscript S divided by MPL subscript B equals three-halves. It is briefly highlighted.

(Speaker)
The opportunity cost of one bicycle is four-thirds, or one and a third of snowboards in Foreign, since the price of bicycles in Foreign divided by the price of snowboards in foreign equals eight-sixth, which equals four-thirds.

(Description)
The value in the column Foreign and the row Comparative Advantage is, MPL star subscript S divided by MPL star subscript B equals four-thirds. It is highlighted.

d.
Correct. The opportunity cost for producing a bicycle is lower in Foreign (4/3 snowboards) than in Home (3/2 snowboards); Foreign therefore has a comparative advantage in producing bicycles. Given Foreign’s comparative advantage, Home has a comparative advantage in the production of snowboards. Thus Home will export snowboards, and Foreign will export bicycles
Incorrect. The opportunity cost for producing a bicycle is lower in Foreign (4/3 snowboards) than in Home (3/2 snowboards); Foreign therefore has a comparative advantage in producing bicycles. Given Foreign’s comparative advantage, Home has a comparative advantage in the production of snowboards. Thus Home will export snowboards, and Foreign will export bicycles
Video transcript

Work It Out, Chapter 2, Question 4

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Now we will determine which product Home will export and which product Foreign will export.

(Description)
The table from the previous question is shown.

(Speaker)
To do so, we’ll need to consider which country has a lower opportunity cost in the production of that good and therefore has a comparative advantage in the production of that good. If a country has a comparative advantage in the production of a good, it will export that good. If a country has a comparative advantage in the production of a good, it will export that good. The opportunity cost for producing a bicycle is lower in Foreign, four-thirds snowboards, than in Home, 3/2 snowboards; Foreign therefore has a comparative advantage in producing bicycles.

(Description)
Values in the row Comparative Advantage are briefly highlighted.

(Speaker)
Given Foreign’s comparative advantage, Home has a comparative advantage in the production of snowboards. Because it has a comparative advantage in the production of snowboards, Home will export snowboards. Because Foreign has a comparative advantage in the production of bicycles, Foreign will export bicycles.