University of Toronto

Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

Solved Problems: Gains from Trade

Version Without Solutions
1. Choose the Correct Answer: Andreas and Katya can only produce beer and chips.1
Andreas has a comparative advantage in neither beer nor chips. We therefore know that:
(a) Katya has an absolute advantage in the production of beer and chips;
(b) Andreas and Katya have the same opportunity cost for beer and chips;
(c) Katya has a comparative advantage in the production of both beer and chips;
(d) Andreas must have lower opportunity costs of production in both goods; or
(e) none of the above.
2. It takes Katya 4 hours to produce an ounce of chips, and 3 hours to produce an ounce of
beer. It takes Andreas 2 hours per ounce of chips, and X hours per ounce of beer.
(a) Who has the absolute advantage in the production of chips?
(b) Over what range of X does Katya have the absolute advantage in beer?
(c) Over what range of X does Andreas have the absolute advantage in chips?
(d) Over what range of X do we expect Andreas to trade beer in exchange for chips?
(e) Over what range of X do we expect Andreas to trade chips in exchange for beer?
3. Assume a world with 2 goods (food and medicine) and two countries. Figure 1 depicts the
production possibilities frontiers (PPFs) for these two countries. Absent trade, both countries
produce and consume both food and medicine.

Figure 1: Different Production Possibilities Frontiers for Boblandia and Gazzalestan

(a) Choose the Correct Answer: Based on Figure 1, what do we know about voluntary
trade that makes both countries better off?
1

Thanks to Prof. Pesando for this question.

20160830: Page 1

Gains from Trade: Problems

University of Toronto
Department of Economics

ECO100: Introductory Economics

Robert Gazzale, PhD

i. Boblandia will export medicine to Gazzalestan in exchange for food.

ii. Gazzalestan will export medicine to Boblandia in exchange for food.
iii. Trade can make both better off, but we do not know which country will export
which good.
iv. Trade that makes both countries off is not possible.
4. True, False, or Uncertain Assume that each of two countries (Gazzalestan and Boblandia)
can produce food and medicine. Assume each faces a constant opportunity cost of producing
food, but this constant opportunity cost differs across countries. Finally, assume that if
both Gazzalestan and Boblandia specialize in food production, Gazzalestan would produce
more food. TFU: If trade results in one country specializing in food production, it will be
Gazzalestan.
5. True, False, or Uncertain Assume that each of two countries (Gazzalestan and Boblandia)
can produce food and medicine. Assume each faces a constant opportunity cost of producing
food, but this constant opportunity cost differs across countries. TFU: If Boblandia has a
comparative advantage in in food production, Gazzalestan specializes in medicine production.
6. True, False, or Uncertain Ragan and Marco want to efficiently divide two household tasks:
diaper changing and laundry folding. It takes Ragan 2 minutes to change a diaper while it
takes Marco 5 minutes. TFU: Ragan should change the diapers, with Marco only changing
diapers if Ragan has devoted all of her time to diaper changing.
7. Rahul and Xianwen each have 8 hours per day. Each hour, Rahul can produce either 1.5 units
of barley or 0.5 units of hops. Each hour, Xianwen can produce either 0.5 units of barley or
2 units of hops.
(a) Assume that without trade, both Rahul and Xianwen produce both barley and hops.
For each guy, what is the (opportunity) cost of producing an extra unit of barley?
(b) Rahul and Xianwen are about to enter into trade negotiations. We know that the price
of barley (in terms of units of hops) must fall into a certain range. What is this range?
(c) Rahul and Xianwen are about to enter into trade negotiations. We know that the price
of hops (in terms of units of barley) must fall into a certain range. What is this range?
(d) Assume that Rahul and Xianwen have traded to an outcome where 18 units of hops have
been efficiently produced. How many units of barley have been produced?
(e) Assume that Rahul and Xianwen have traded to an outcome where 18 units of hops have
been efficiently produced. What is the opportunity cost of an extra unit of barley?
(f) Assume that Rahul and Xianwen have traded to an outcome where 8 units of hops have
been efficiently produced. How many units of barley have been produced?
(g) Assume that Rahul and Xianwen have traded to an outcome where 8 units of hops have
been efficiently produced. What is the opportunity cost of an extra unit of barley?

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Gains from Trade: Problems