How-to for Problem Set 1a

Friday, 09/07/01

The following is a no-frills, step by step instruction set on how to do the various things required in problems 1 and 2 of Problem Set 1. For the following instructions, assume there are two producers A and B who can use input resource L to make good X and good Y.

Finding Absolute Advantage in Making X

You need to know:

• How much output X can be made per input L by all players

1. If necessary, divide the amount of X output produced by the amount of inputs L used for each player. This gets you the output per input rates.
2. Compare the output per input rates of all players.
3. Producer with the highest output per input rate (Most X per L) has absolute advantage.
4. Done.

Finding Opportunity Cost of Making X in Terms of Y

You need to know:

• How much output X can be made per input L by all players
• How much output Y can be made per input L by all players

1. If necessary, divide the amount of X output produced by the amount of inputs L used for each player. This gets you the output per input rates for good X. Also do this for Y if necessary.
2. For each player, set "output X per L" equal to "output Y per L." Solve the equations so the left hand side of each equation is 1X.
3. The right hand side of each equation is the opportunity cost of X in terms of Y for that player.
4. Done.

Finding Comparative Advantage of Making X

You need to know:

• How much output X can be made per input L by all players
• How much output Y can be made per input L by all players

1. Find the opportunity cost of X in terms of Y for each player.
2. Lowest opportunity cost for X in terms of Y has comparative advantage in producing X.
3. Done.

Graphing a Production Possibilities Frontier for Producer A

You need to know:

• How much output X can be made per input L by A
• How much output Y can be made per input L by A
• How much input L is available to A

1. Draw axes and label them X and Y. Put a title on the graph.
2. Find out how much X can be made if A uses all of his L in making X. Plot this extreme X point. It should be on the X axis. Label this point with the quantity of X produced.
3. Find out how much Y can be made if A uses all of his L in making Y. Plot this extreme Y point. It should be on the Y axis. Label this point with the quantity of Y produced.
4. If you like, plot a point in between these two extreme points. A good one to pick is the output bundle A can make by using half his L to make X and half his L to make Y.
5. Connect the dots with a line.
6. You can get the slope by looking at the extreme points. Take the Y output from the extreme Y point on the Y axis and divide that by the X output from the extreme X point on the X axis.
7. Done.