..ooo AT&T; 8:47 PM @ 14% kings.mrooms2.net Chapter 8 Homework 1. The following
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..ooo AT&T; 8:47 PM @ 14% kings.mrooms2.net Chapter 8 Homework 1. The following economies produce jalapeno peppers and/or tomatoes. A) The economy of Pittston can devote all available resources to producing either jalapeno peppers or tomatoes and produce 10 or 60 pounds, respectively. Calculate the opportunity cost of producing tomatoes in terms of jalapeno peppers. B) The economy of Albuquerque has an opportunity cost of tomateo production (in terms of peppers) equal to 1.2 (that is, 1.2 peppers must be foregone when 1 extra tomato is produced). After specialization, which economy would produce jalapeno peppers? Which would produce tomatoes? Explain your reasoning. 2. The economy of Pennsylvania can produce grapes and hardwood lumber (such as black cherry, red maple, red oak, and sugar maple). You notice that the price of forest-land and logging machines are high, while the price of labor is low. Explain, using the Heckschler-Ohlin model, what causes the price differences. Which good, grapes or hardwood, do you predict Pennsylvania has the comparative advantage in? 3. When an economy is under autarky the price of eggplant is $5. The world price of eggplant is $3.50. If opened to the world market, would consumers or producers benefit? Would consumers or producers lose? Explain your reasoning (using a graph would be beneficial).Explanation / Answer
Q1
(A) Using all its resoruces, economy of Pittston can produce either 10 pounds of jalapeno peppers or 60 pounds of tomatoes.
Thus,
60 pounds of tomatoes = 10 pounds of jalapeno peppers
1 pound of tomato = (10/60) pounds of jalapeno peppers
1 pound of tomato = 0.17 pounds of jalapeno peppers
This means 0.17 pound of jalapeno peppers must be foregone to produce 1 extra pound of tomato.
Thus, the opportunity cost of producing tomatoes in terms of jalapeno peppers is 0.17.
(B) A country specializes in production of that good which it can produce at lower opportunity cost in comparison to other countries.
The economy of Albuquerque has an opportunity cost of tomato production (in terms of peppers) equal to 1.2 while economy of Pittston has an opportunity cost of tomato production (in terms of peppers) equal to 0.17.
Since, economy of Pittston has lower opportunity cost with respect to tomato production in comparison to economy of Albuquerque, it must specialize in production of tomatoes.
The economy of Albuquerque has an opportunity cost of tomato production (in terms of peppers) equal to 1.2. so, it will have an opportunity cost of pepper production (in terms of tomatoes) equal to (1/1.2) 0.83.
The economy of Pittston has an opportunity cost of tomato production (in terms of peppers) equal to 0.17. So, it will have an opportunity cost of pepper production (in terms of tomatoes) equal to (1/0.17) 5.88.
Since, economy of Albuquerque has lower opportunity cost with respect to pepper production in comparison to economy of Pittston, it must specialize in production of peppers.
So, after specialization, economy of Albuquerque will produce jalapeno peppers and economy of Pittston will produce tomatoes.
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