Chapter 1 Tutorial 1

Here are 3 similar questions:

1. Econ A can produce either 24bl units of Y or 12bl units of X (or any linear combi of the 2). Econ B can produce either 12bl units of Y or 12bl units of X. Econ A must carry on consuming at least 12bl Y and Econ B must consume at least 6bl units of X. There can be no trade between both countries. True or False? Explain

2. 2 Econs produce only X and Y. Econ 1 can produce either 80 Y or 20 X (or any linear combi of the 2). Econ 2 can produce either 40 Y or 20 X. Therefore, there exists no price for which Econ 1 gains from trading with Econ 2. True or False? Explain.

3. Consider 2 Econs where labour is the only means of production and they both produce only X and Y. In Econ A, 1unit of labour can make either 2y or 4x. In Econ B, 1unit of labour can make either 1y or 1x. Econ A has 100 units of labour and 200units of labour in Econ B.  As a unit of labour in Econ A can produce more of either X or Y than a unit of labour in Econ B, Econ A would not wish to trade with Econ B. True or False? Explain.

The important similarities have been highlighted n red. Can you identify why these are important?

There is only one phrase highlighted in blue because it is different from the rest of the questions. Will you be able to think out of the box?

Suggested approach:

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Author: admin

16 Comments

  1. chingsarn says:

    hi, may i ask that are the answers for all the 3 questions false? and if i may ask, could you provide the graph (answer) for qn 3 as i am not quite sure how to draw the final graph (after trade). it would be very helpful if you could help me out in this =D and thanks for your videos, they are very helpful =D

    • Hello!

      You are absolutely right! The answer for all questions is false. Why? Because in all the questions, the economies each have a comparative advantage in producing x/y.

      Look at my calculations for the opportunity costs of x/y (OCx/y). You should check to see if you get the same results too.

      Question 1:
      Econ A: OCx = 2y per x, OCy = 1/2x per y
      Econ B: OCx = 1y per x, OCy = 1x per y

      Therefore, Econ A has the comparative advantage in producing y and Econ B has the comparative advantage in producing x. Whoever has the lower opportunity cost is known to have the comparative advantage. So Econ A will specialize in producing y and Econ B specialize in producing x. In this way, with the right international price (you should know how to determine this), both economies should trade. The concept is similar for questions 2 and 3. Let’s look at the calculations for opportunity costs.

      Question 2:
      Econ A: OCx = 4y per x, OCy = 1/4x per y
      Econ B: OCx = 2y per x, OCy = 1/2x per y

      Question 3:
      Econ A: OCx = 1/2y per x, OCy = 2x per y
      Econ B: OCx = 1y per x, OCy = 1x per y

      I hope that helps. I will be uploading the graph for question 3 soon. 🙂

    • Hey the graphs are up already! 🙂 it’s in a powerpoint format with animations so that you can see the step by step approach. 🙂 All the best!

  2. :) says:

    may i know where’s the powerpoint? i cannot find it. will appreciate if you could provide a link 🙂 and thanks for your videos!

  3. Matthew Hong says:

    Hello!
    Sorry but can I just double check regarding the file for slide 3,

    if econ B has 200 units of labour, and 1 unit of labour can produce 1x or 1y, shouldn’t it be able to produce 200x or 200y instead of 100x or 100y?

    • Oh dear, thank you so much for pointing that out to me! You’re right! So sorry for the mistake! There’s also a spelling mistake. The Econ A on the right side should be Econ B! So Sorry and thanks once again for pointing that out!

  4. Giriesh GK says:

    Sorry. Is the link that you mentioned still below question 3? i only see the “mindmap” diagram? I dont see any links leading to a powerpoint. And boy am i glad i ran into this site. Hats off to you Quickienomics.

    • Quickienomics says:

      Hello! Yes they is supposed to be a powerpoint but one of my kind viewers managed to spot a mistake! so i’ve taken it down to make changes. Sorry for the inconvenienced cause. 🙁
      r u having any difficulties with the questions? Maybe u can let me know what ur doubts r first so that i can help u out?

  5. Tammy says:

    When could you submit the link of the powerpoints which we could see more full explanation about the three questions. Thanks ! The UOL exam is coming …

  6. Hash says:

    In Question 1 since they have a comparative advantage they should trade. However in this question they have mentioned what each economy is going to consume. So are you suppose to show the exports and imports? And if so, when u get the imports and exports of each economy, one economy’s import does not equal to the other economy’s export. And since they are only trading with each other does that mean trade cannot take place?

  7. Nicholas says:

    Hello. I cannot seem to find the answers graph for the following questions. Is it still somewhere around?

    Thanks!