Econ2113 PS1 Answers

ECON 2113: Microeconomic (L5 and L10)
Assignment 1 (Chapter 1 and Chapter 2)

Due: 11:45pm on September 27, 2022
Part 1: Multiple Choice Questions (Please choose the best answer)
1. B
2. A
3. C
4. D
5. A
6. B
7. A
8. B
9. B
10. C
11. D
12. B
13. A
14. B
15. D
16. D
17. A
18. C
19. B
20. D
1
Part 2: Short and Long Questions
Use the following data to work Question 1 to 3.

Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food
crops. The table to the right sets out Brazil’s production possibilities for ethanol and food crops.
Ethanol Food crops

(barrels per day) (tons per day)
70 and 0
64 and 1
54 and 2
40 and 3
22 and 4
0 and 5
Question 1
(a) Draw a graph of Brazil’s PPF and explain how your graph illustrates scarcity.
The diagram below shows Brazil’s PPF.
The production possibilities frontier indicates scarcity because it shows the limits to what can be
produced. In particular, production combinations of ethanol and food crops that lie outside the
production possibilities frontier are not attainable.
(b) If Brazil produces 40 barrels of ethanol a day, how much food must it produce to achieve
production efficiency?
If Brazil produces 40 barrels of ethanol per day, it achieves production efficiency if it also
produces 3 tons of food per day.
(c) Why does Brazil face a tradeoff on its PPF?

Brazil faces a tradeoff on its PPF because Brazil’s resources and technology are limited. For
Brazil to produce more of one good, it must shift factors of production away from the other
good. Therefore, to increase production of one good requires decreasing production of the other,
which reflects a tradeoff.
2
Question 2
(a) If Brazil increases ethanol production from 40 barrels per day to 54 barrels per day, what is
the opportunity cost of the additional ethanol?
When Brazil is production efficient and increases its production of ethanol from 40 barrels per
day to 54 barrels per day, it must decrease its production of food crops from 3 tons per day to 2
tons per day. The opportunity cost of the additional ethanol is 1 ton of food per day for the entire
14 barrels of ethanol or 1/14 of a ton of food per barrel of ethanol.
(b) If Brazil increases food production from 2 tons per day to 3 tons per day, what is the
opportunity cost of the additional food?
When Brazil is production efficient and increases its production of food crops from 2 tons per
day to 3 tons per day, it must decrease its production of ethanol from 54 barrels per day to 40
barrels per day. The opportunity cost of the additional 1 ton of food crops is 14 barrels of
ethanol.
(c) What is the relationship between your answers to parts (a) and (b)?
The opportunity costs of an additional barrel of ethanol and the opportunity cost of an additional
ton of food crop are reciprocals of each other. That is, the opportunity cost of 1 ton of food crops
is 14 barrels of ethanol and the opportunity cost of 1 barrel of ethanol is 1/14 of a ton of food
crops.
Question 3
Does Brazil face an increasing opportunity cost of ethanol? What feature of Brazil’s PPF
illustrates increasing opportunity cost?
Brazil faces an increasing opportunity cost of ethanol production. For instance, when increasing
ethanol production from 0 barrels per day to 22 barrels the opportunity cost of a barrel of ethanol
is 1/22 of a ton of food while increasing ethanol production another 18 barrels per day (to a total
of 40 barrels per day) has an opportunity cost of 1/18 of a ton of food per barrel of ethanol.
The PPF’s bowed outward shape reflects the increasing opportunity cost.
Use the following data to work Question 4 and 5.

In an hour, Marco can produce 5 cups of pesto sauce or 15 platters of pasta and Giorgia can
produce 8 cups of pesto sauce or 20 platters of pasta.
Question 4
(a) Calculate Marco’s opportunity cost of producing a cup of pesto sauce.
Marco forgoes 15 platters of pasta to produce 5 cups of pesto sauce, so Marco’s opportunity cost
of producing one cup of sauce is (15 platters of pasta/(5 cups of pesto sauce) or 3 platters of
pasta per cup of pesto sauce.
(b) Calculate Giorgia’s opportunity cost of producing a cup of pesto sauce.

Giorgia forgoes 20 platters of pasta to produce 8 cups of pesto sauce, so Giorgia’s opportunity
cost of producing one cup of sauce is (20 platters of pasta)/(8 cups of pesto sauce) or 2.5 platters
of pasta per cup of pesto sauce.
3
(c) Who has a comparative advantage in producing pesto sauce?
Giorgia’s opportunity cost of a cup of pesto sauce is lower than Marco’s opportunity cost, so
Giorgia has a comparative advantage in producing pesto sauce.
(d) If Marco and Giorgia specialize in producing the good in which they have a comparative
advantage, and then trade 11 platters of pasta for 4 cups of pesto sauce, who gains from the
specialization and trade?
Giorgia specializes in pesto sauce and Marco specializes in pasta. Both Marco and Giorgia gain
from trade.
Marco gains because he can obtain pesto sauce from Giorgia at a cost of (11 platters of pasta)/(4
cups of pesto sauce), which is 2.75 platters of pasta per cup of pesto sauce, a cost that is lower
than what it would cost him to produce pesto sauce himself.
Giorgia also gains from trade because she trades pesto sauce for pasta at 2.75 platters of pasta per
cup of pesto sauce, which is higher than her cost of producing a cup of pesto sauce.
Question 5
Suppose that Giorgia finds a new way to cook pasta that enables her to make 30 platters an hour.
(She can still make only 8 cups of pesto sauce an hour.)
(a) Who now has a comparative advantage in producing pasta?

Marco forgoes 5 cups of pesto sauce to cook 15 platters of pasta, so Marco’s opportunity cost of
producing pasta is (5 cups of pesto)/(15 platters of pasta) or 0.33 cups of pesto sauce per platter
of pasta.
Giorgia forgoes 8 cups of pesto sauce to produce 30 platters of pasta, so Giorgia’s opportunity
cost of producing pasta is (8 cups of pesto)/(30 platters of pasta) or 0.267 cups of pesto sauce per
platter of pasta.
Giorgia has the comparative advantage in cooking pasta because her opportunity cost of a platter
of pasta is lower than Marco’s opportunity cost.
(b) Can Marco and Giorgia still gain from trade?

Marco and Giorgia can still gain from trade because Giorgia (now) has a comparative advantage
in producing pasta and Marco (now) has a comparative advantage in producing pesto sauce.
Giorgia will produce pasta and Marco will produce pesto sauce.
(c) Would Marco and Giorgia still be willing to trade 11 platters of pasta for 4 cups of pesto
sauce? Explain your answer.
Marco and Giorgia will not be willing to trade 11 platters of pasta for 4 cups of pesto sauce. The
(new) cost of pasta is (4 cups of pesto)/(11 platters of pasta) or 0.364 cups of pesto sauce per
platter of pasta. In particular, Marco, whose comparative advantage lies in producing pesto
sauce, can produce 1 platter of pasta at an opportunity cost of only 0.33 cups of pesto sauce. So
Marco will be unwilling to pay any more than 0.33 cups of pesto sauce per platter of pasta.

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ECON 2113: Microeconomic (L5 and L10)

Assignment 1 (Chapter 1 and Chapter 2)

Part 1: Multiple Choice Questions (Please choose the best answer)

Use the following data to work Question 1 to 3.

Ethanol Food crops

(c) Why does Brazil face a tradeoff on its PPF?

Use the following data to work Question 4 and 5.

(b) Calculate Giorgia’s opportunity cost of producing a cup of pesto sauce.

(a) Who now has a comparative advantage in producing pasta?

(b) Can Marco and Giorgia still gain from trade?

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