CHAPTER.2.

THE ECONOMIC PROBLEM: SCARCITY AND CHOICE

Q.1. Alexi and Tony own a food truck that serves only two items: street tacos and sandwiches. As shown below:
Taco Cuban Sandwich
Alexi 80 20
Tony 100 30

(a) For Alexi and for Tony what is the opportunity cost of a street taco? Who has a comparative adv. In
the production of street tacos? Explain your answer.
For Alexi, the “cost” of a street taco is one-fourth of a Cuban sandwich. For Tony, the “cost” of a street taco is
three-tenths of a Cuban sandwich. Alexi has a comparative advantage in street tacos.
(b) who has a comparative advantage in production of Cuban sandwiches? Explain your answer.
Tony has a comparative advantage in the production of Cuban sandwiches because the opportunity cost (3.33
street tacos) is lower for Tony than it is for Alexi (4 street tacos).
c) Assume that Alexi works 20 hours per week in the business. Assuming Alexi is in business on his own, graph
the possible combinations of street tacos and Cuban sandwiches that he could produce in a week. Do the same
for Tony.

Q.2. The countries of Orion and Scorpius are small mountains nations. Both produce granite and blueberries.
Each nation has a labor force of 800. The below mentioned table shows production per month for each worker
in each country. Assume productivity is constant and identical for each worker in each country.
Tons of granite bushels of blueberries
Orion workers 6 18
Scorpius workers 3 12
a) Which country has an absolute andvantage in the production of granite ? which country has an
absolute advantage in the production of blueberries?
Orion Orion

b) Which country has a comparative advantage in the production of of granite? Of blueberries?

Orion: granite
Scorpius: blueberries

c) Sketch the ppf for both countries.

Q.3.A nations with fixed quantities of resources is able to produce any of the following combinations of carpet
and carpet looms:
Yards of carpet (millions) carpet looms(thousands)
0 45
12 42
24 36
36 27
48 15
60 0
a) Using the data in the table praph the ppf (with carpet on the vertical axis)

b) Does the principle of opportunity cost hold in this nation? Explain briefly.
Yes, increasing opportunity cost applies. The opportunity cost of the first 12 million yards of
carpet is 3 thousand looms; of the next 15 million yards, 4 looms; and so on.