1. Consider an accounting firm with two accountants.
a. Fill in the blanks in the following table.

b. Quigley has a comparative advantage in_____________, while Slokum has a comparative advantage in______.
2. Mike, the manager of a car wash, is more productive at washing cars than any potential workers he could hire. Should he wash all the cars himself? _____________ (Yes/No)
3. Pat and Terry run a landscaping firm that cuts lawns and prunes trees. Pat is more productive than Terry at both tasks. Pat should cut lawns and Terry should prune trees if Pat has a_______ in cutting lawns.
4. Adam Smith listed three reasons for specialization to increase productivity: (1) _____; (2) _____; and (3) _____.
5. President Lincoln s discomfort with imports resulted from his failure to recognize that money sent to England eventually ____.
6. Exchange in an Island Economy. Robin and Terry are stranded on a deserted island and consume two products, coconuts and fish. In a day, Robin can catch 2 fish or gather 8 coconuts, and Terry can catch 1 fish or gather 1 coconut.
a. Use these numbers to prepare a table like Table. Which person has a comparative advantage in fishing? Which person has a comparative advantage in gathering coconuts?

b. Suppose that each person is initially self-sufficient. In a six-day week, Robin produces and consumes 32 coconuts and 4 fish, and Terry produces and consumes 3 coconuts and 3 fish. Show that specialization and exchange (at a rate of 3 coconuts per fish) allows Robin to consume more coconuts and the same number of fish and allows Terry to consume more coconuts and the same number o fish. Illustrate your answer with a graph like figure.

7. Technological Innovation and Exchange. Recall the example of Fred and Kate shown in table. Suppose a technological innovation, such as a rope ladder, increases the coconut productivity of both people: Fred can now produce three coconuts per day, while Kate can now produce two coconuts per day. Their productivity for fish has not changed. Suppose they agree to trade one coconut for each fish. Will both people gain from specialization and trade?

8. Comparative Advantage in Selling. Selma is a better salesperson than Mark in both city A and city B.

a. If each person handles one city and the objective is to maximize total sales, which city should each person handle?
b. Is your answer to (a) consistent with the notion of exploiting comparativeadvantage?

Transcribed Image Text:

Quigley Slokum Financia Tax Financial Tax Statements Returns Statements Returms Output per hour Opportunity cost PRODUCTIVITY AND OPPORTUNITY COSTS Fred Kate Coconuts Fish Coconuts Fish Outputper day Opportunity cost 3 fish 113 coconut 1 fish 1 coconut Specialize: Fred in Fish, Kate in Coconuts Self-Sufficient Exchange 10 Fish and S Coconuts Fred produces and consumes 4 coconuts and 24 fish Fred specializes and fish produces 36 Fred gi ves Kate 10 fish for 5 He gains I coconut and 2 fish (24) (36) (26) Kate produces and consumes I coconut and 5 fish Kate specializes and produsKate gives Fred 5 coconuts for 10 fish. coconuts She gains 5 fish (10) PRODUCTIMTY AND OPPORTUNITY COSTS Fred Kate Coconuts Fish Coconuts Fish Output per day Opportunity cost 3 fish 1/3 coconut 1 fish 1 coconut Selma Mark 48 40 24 10 Sales per day in oty B