ECON1: Comparative and Absolute Advantage

Under what conditions is the production possibilities frontier linear rather than bowed out?

Respuesta: The production possibilities frontier is linear when the producer can switch producing products at a constant rate. A bowed out graph occurs when the rate at which the good is traded depends on the amount of the good being produced.

Explain how absolute advantage and comparative advantage differ.

Respuesta: Absolute advantage is given to the producer who can create a good with a smaller quantity of inputs while the comparative advantage is given to the producer with a smaller opportunity cost.

Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

Respuesta: An example is that I can build a chair faster than my neighbor Jimmy, therefore, I have absolute advantage, however, my opportunity cost is going to work and losing $100 while Jimmy only gets paid $50 at work. Jimmy has a comparative advantage because I am losing more through opportunity cost.

Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 3.

Respuesta: Comparative advantage is more important because in the long run if you are engaging in an activity that has a higher opportunity cost than another, you are being inefficient. The producer is not working to their full potential and losing money in the larger scheme. If I can pay $50-$99 for Jimmy to build a chair we are both profiting because he is getting more than what he would get if he went to work and I am getting paid while still benefitting from the situation.