NOTE: Please pay particular attention to the way that answers are stated, because these are the kinds of statements that will be looked for in the quizzes and final exam. In general, all answers need to be supported with appropriate reasoning.
CHAPTER 25
Chapter 25 Question 8
8. A country (or individual) has an absolute advantage when it can produce more of a good or service than another. A comparative advantage exists when one country’s opportunity cost to produce a good is lower than another country’s. Michelle Wie would hire you to do laundry since your opportunity cost of doing laundry is less than hers. In the 2 or 3 hours that it takes to do her laundry, she could earn far more than what she would have to pay you.
Chapter 25 Question 12
12a. India in tea, Italy in olives. India’s opportunity cost for 1 million tons of olives is 15 million tons of tea. Italy’s opportunity cost for olives is 1.7 mil-lion tons of tea for 1 million tons of olives. Italy’s opportunity cost for olives is lower, so it will specialize in olive production.
13b. See the table below. Yes, they both are better off, as shown in the last column. Chapter 25 Question 13
13a. At $10, unit total sales will be 16 million, with imports equal to the differ-ence between 16 million total sales and domestic supply of 4 million units, so imports will be 12 million and as a percent of U.S. sales are equal to 12/16 75%.
13b. 4 million; at a price of $15 ($10 $5 tariff), total sales are 12 million and domestic supply is 8 million units.
13c. Imports are 4 million times $5 a unit, so the total revenue from the tariff is $20 million.
13d. When the price was $10, domestic sales revenue was $10 4 million units $40 million. With the $5 tariff, sales revenue is $15 8 million units $120 million, so revenues have increased by $80 million. No wonder domestic