Managerial economics: principles and applications

U.S.

Japan

Cars

Grain

For the United States, the opportunity cost of one car is 2.5 tons of grain. The opportunity cost of one ton of grain is 0.4 cars. For Japan, the opportunity cost of one car is 1.25 tons of grain. The opportunity cost of one ton of grain is 0.8 cars.

Japan

Car

tons of grain

tons of grain

Grain

cars

cars

Neither country has an absolute advantage in producing cars. They are equally efficient. The United States has an absolute advantage in producing grain.

Japan has a comparative advantage in producing cars, since it costs them only 1.25 tons of grain, versus 2.5 tons for the U.S. The United States has a comparative advantage in producing grain, since it costs them 0.4 cars, compared with 0.8 cars for Japan.

f. Without trade, the United States would produce 2 cars and 5 tons of grain. Japan would produce 2 cars and 2.5 tons of grain.

g. Trade would make both countries better off. In this example, using the figures in (f) the total output of the U.S. And Japan combined would be 4 cars and 7.5 tons of grain. If each country produced only the product in which it has a comparative advantage, that is to say the U.S. produced only grain and Japan produced only cars, the total output would be 4 cars (all from Japan) and 10 tons of grain (all from the U.S.).

11. A In this example, the equilibrium price and quantity is $6 and 81 pizzas.

b. If the price was above $6, there would be too much supply and not enough demand. The market for pizzas would move towards equilibrium, however. Pizza suppliers would have excess capacity. They would address this issue two ways. First, they would take steps to reduce capacity, for example a pizza maker could go out of business. Second, the pizza makers would lower their prices in order to stimulate demand and fill out the excess capacity. In this way, the price of pizza would be reduced through competition, and the supply of pizza would also be reduced as inefficient operators lose money and quit the business. As the price of pizza comes down, more buyers will enter the market. This will result in an increase in demand for pizzas. The total result of this is that the demand, supply and price will all trend towards the equilibrium point.