Tutorial 1 Question 1 Combination A B C D E F G Wine (thousands of bottles per year) 1 3 5 7 9 Wine (thousands of bottles per year) 0 2 4 6 8 Question 2 10 12 Bread (thousands of loaves per year) 21 20 18 15 11 6 0 Willingness to pay (loaves of bread per bottle of wine) 2.5 2.0 1.5 1.0 0.5 2) The Hobbits of the Shire are trying to decide how much bread and how much wine to produce. They ask you to be their economic consultant and give you the information in the first table above about different combinations of wine and bread that they can produce if they are fully employed and doing their best. The Hobbits also give you the information in the second table above about their willingness to pay for wine depending on how much wine they already have. To help the Hobbits solve their problem: a) Draw the Shire's production possibilities frontier. Put wine on the horizontal axis. b) What is the opportunity cost of the first two thousand bottles of wine? What is the marginal cost of the 3,000th bottle of wine? What is the marginal cost of the 3,000th loaf of bread? c) Draw the marginal cost of wine curve. What happens to the marginal cost if production of wine increases? Why? d) Draw the marginal benefit from wine curve on the same figure on which you put the marginal cost curve. Describe the relationship between the quantity of wine produced and the marginal benefit from wine. e) What combination of bread and wine will you recommend the Hobbits to produce? Why? Explain to the Hobbits why they would be worse off by producing a different combination of bread and wine. Sarah and her boyfriend Mike want to save some money to pay for their wedding. So they decided to help people in the neighborhood by cleaning their garages and mowing lawns. Sarah takes 60 minutes to clean a garage and 80 minutes to mow a lawn. Mike takes 80 minutes to clean a garage and 80 minutes to mow a lawn. Sarah and Mike devote 10 hours per week each to these activities and get paid $25 for each garage they clean and $25 for each lawn they mow. Sarah says to Mike: "I have an absolute advantage in cleaning and we are equally productive in mowing. Therefore I should do both cleaning and mowing but you should only mow lawns." Mike disagrees. He thinks Sarah should specialize in cleaning garages and he should specialize in mowing lawns. Help Sarah and Mike to resolve their dispute. a) Who has an absolute advantage in cleaning garages? In mowing lawns? Explain. b) Draw Sarah's and Mike's production possibilities frontiers. What are each individual's opportunity costs? c) Who has a comparative advantage in cleaning garages? In mowing lawns? Explain. d) Is Sarah right when she says that she should do both cleaning and mowing while Mike should only mow lawns? Or may be Mike is right when he suggests that Sarah specializes in cleaning and he specializes in mowing? Illustrate and substantiate your answer with a numerical example.

Tutbrlal 1 Quention 1 2) The Hobelts of the Shire are trying to decide hiw much lread and hos mash wice bo poodace. They the 3oc0th betrle of wine? What is the marginal wot ut the 3000th lad of berol? 6) Draw the marginal ant of wine curve What haprene be the inarcond dist af jwobethat of wise incremes? Why? wise. Qeration? doun a garaze and 80 minutes to mow a bown. Mike takes so minuts to deas a guragy and so ninutes to miw a Liwn Sarah and Mike deviee to hurs per week rath io these attivifes and pot pald sts fur each he swould specialiee in mexe ing lawm. Help Sarah and Mise to resolve their difyuse coss? Tutbrlal 1 Quention 1 2) The Hobelts of the Shire are trying to decide hiw much lread and hos mash wice bo poodace. They the 3oc0th betrle of wine? What is the marginal wot ut the 3000th lad of berol? 6) Draw the marginal ant of wine curve What haprene be the inarcond dist af jwobethat of wise incremes? Why? wise. Qeration? doun a garaze and 80 minutes to mow a bown. Mike takes so minuts to deas a guragy and so ninutes to miw a Liwn Sarah and Mike deviee to hurs per week rath io these attivifes and pot pald sts fur each he swould specialiee in mexe ing lawm. Help Sarah and Mise to resolve their difyuse coss