Question 1:

To decide whether to take a vacation, compare costs and benefits:

1. Calculate Costs: Include direct costs (airfare, hotel, etc.) and opportunity costs (forgone wages).

2. Quantify Benefits: Estimate the monetary value of psychological benefits (e.g., relaxation,
enjoyment).

3. Compare: If the monetary value of the benefits exceeds the total costs, the vacation is
worthwhile.

Example:

• Total Costs: $4,200

• Estimated Benefits: $5,000

Since $5,000 (benefits) > $4,200 (costs), the vacation is worth it.

Question 2:

The following circular flow diagram represents the flow of income from firms to households and from
households to the firm. The firm produces goods and services and supplies them to households. The
households provide their labor and other factor services in the production process for which they get
paid by the firm. Thus, the goods, services, and payments flow between the two.

(a) There is a flow of goods from the firms to households as Selena buys the good (milk) produced by the
firm and, in return, pays them $1, so the flow of dollars is from household to firm.
(b) Stuart provides his services to the restaurant, so in the factor market, there is a flow from household
to firm as Stuart provides his services. Also, Stuart gets $8 per hour as factor payments, and thus, the
dollar flows from firm to household.

(c) The movement of dollar ($40) is from household to firm as Shanna has paid $40, whereas the flow of
services in the form of haircut is from the firm to household.

(d) Here, only the dollar flows as Salma earns $20,000 on her investment. The flow is from firm to
household.

Question 3:

a. Absolute Advantage:

Scones: England (50 scones/hour vs. 40 scones/hour)

Sweaters: Scotland (2 sweaters/hour vs. 1 sweater/hour)

Comparative Advantage:

Scones: England (lower opportunity cost: 1 scone = 1/50 sweaters vs. Scotland's 1/40 sweaters)

Sweaters: Scotland (lower opportunity cost: 1 sweater = 1/2 scones vs. England's 1 scone)

b. Trade:

Scotland has a comparative advantage in producing sweaters and England in producing scones.
Therefore, under trade:

- Scotland will export sweaters to England.

- England will export scones to Scotland.

This trade allows both countries to specialize in the production of goods for which they have a
comparative advantage, thus increasing overall efficiency and total output.

c. If a Scottish worker produces 1 sweater per hour:

Scotland's new opportunity cost: 1 sweater = 40 scones.

Comparative Advantage: England would still have a comparative advantage in scones, and Scotland in
sweaters, but both countries can still gain from trade by specializing and trading according to their
comparative advantages. Thus, both Scotland and England would still gain from trade.