Question 4 John and Sotiris live on trees in two different forests. They each have eight hours to work in a day. John ca
Posted: Sun May 08, 2022 9:11 am
Question 4
John and Sotiris live on trees in two different forests. They
each have eight hours to work in a day. John can grow a Yam in 1
hour or raise a Zebra in 2 hours. Sotiris can grow a Yam in 2 hours
or raise a Zebra in 4 hours. Both John and Sotiris consume equal
numbers of Yams and Zebras.
(a)Clearly draw and label PPFs for John and Sotiris and their
consumption bundle in autarky, with Zebras on the vertical axis,
showing how you calculated this. Define and find the opportunity
cost of a yam on each island and discuss how it can be represented
on each PPF. Does John or Sotiris have an absolute or comparative
advantage in producing either Yams or Zebras? (5 marks)
(b)Now suppose John and Sotiris can freely trade at a price of
one Yam per Zebra. How much of each good will John and Sotiris
produce and consume? How much better or worse off in percentage
terms are John and Sotiris? How is this possible? (5 marks)
(c) In class, we have seen that free exchange under perfect
competition can mutually benefit both consumers and producers. In
words, briefly explain how this is possible. Then clearly list five
situations that free exchange can hurt consumers or producers and
an assumption about perfect competition that situation violates.
(10 marks)
(d)When calculating the welfare benefits of markets, the
standard analysis only includes the parties involved in exchange.
Using the American Opioid Crisis as an example, explain how poorly
regulated markets can cause harm to third parties not involved in
exchange. (5 marks)
John and Sotiris live on trees in two different forests. They
each have eight hours to work in a day. John can grow a Yam in 1
hour or raise a Zebra in 2 hours. Sotiris can grow a Yam in 2 hours
or raise a Zebra in 4 hours. Both John and Sotiris consume equal
numbers of Yams and Zebras.
(a)Clearly draw and label PPFs for John and Sotiris and their
consumption bundle in autarky, with Zebras on the vertical axis,
showing how you calculated this. Define and find the opportunity
cost of a yam on each island and discuss how it can be represented
on each PPF. Does John or Sotiris have an absolute or comparative
advantage in producing either Yams or Zebras? (5 marks)
(b)Now suppose John and Sotiris can freely trade at a price of
one Yam per Zebra. How much of each good will John and Sotiris
produce and consume? How much better or worse off in percentage
terms are John and Sotiris? How is this possible? (5 marks)
(c) In class, we have seen that free exchange under perfect
competition can mutually benefit both consumers and producers. In
words, briefly explain how this is possible. Then clearly list five
situations that free exchange can hurt consumers or producers and
an assumption about perfect competition that situation violates.
(10 marks)
(d)When calculating the welfare benefits of markets, the
standard analysis only includes the parties involved in exchange.
Using the American Opioid Crisis as an example, explain how poorly
regulated markets can cause harm to third parties not involved in
exchange. (5 marks)