Absolute Advantage Versus Comparative Advantage - Free Solution

Question: Describe about the Absolute Advantage Versus Comparative Advantage? Answer: On a Valentines Day greeting cards and roses become necessary commodities. The demand for both the goods rises followed by the rise in price. The price of roses always increases more than the price of cards because of price elasticities. The supply elasticity of greetings card on Valentines Day is more elastic than the supply of roses. This is because manufacturers of greetings card can easily increase its production and stock up greetings card. Thus, the supply of cards is relatively elastic. But roses are perishable and are costly enough to increase its supply just for the Valentines Day. This is why the supply is relatively inelastic. (Png et al., 2008) The government imposes a price ceiling of $11 per dozen roses. Price ceiling is the maximum price that the seller can sell to the buyers. The price ceiling provides gains for buyers but some loss is involved for the sellers. (Objectives for Chapter 8 Price Floors and Ceilings, 2015) The gap between the demand and supply causes a shortage of roses. If monitored properly, then this law can be effective to maintain a reasonable price. 2: In consumer behavior what appears to be an irrational behavior to the outsider may be a rational behavior to the individual himself. In this case, the student who was engaging himself in drinking, a day before his exams may seem to be an irrational individual. The irrational behavior arises when an individual has inadequate reason to act, suffering from emotional distress or cognitive deficiency or when individuals interest differs from their expectation, when situation is out of control or one may be fearful, nervous or full of stress. Here the student might be nervous or stressful about his exam the next day and hence he is depicting an irrational behavior by intoxication. The professor might find this rational as some belief that relieving stress is important for exams. (Ariely, 2011) The student can behave rationally by exercising certain stress free techniques to release his nervousness. This could be done by eating well, sleeping well, preparing well for the exam, if possible exercise too be stress free. All these can relieve stress and make the student behave rationally. The profit maximizing condition is given by: Where MR= Marginal Revenue and MC= Marginal Cost. Total Revenue, TR= P(Q)*Q TR= [240 0.10*Q]*Q TR= 240*Q 0.10*Q2 Now: MR= 240 - 0.2*Q Now from the maximizing condition 240 0.2*Q = 30 240 30 = 0.2*Q Q*= 1050 The 1050 wave runners will St. Martin Rentals rent per day. Profit maximizing price (in $) is: P(Q)= 240 0.10*Q* P(Q)= 240 0.10* 1050 P(Q)= 135 Daily revenue (in $): TR= P(Q)*Q TR= 240*Q*- 0.10*(Q*)2 TR= 240*1050 0.10*(1050)2 TR= 141750 The daily cost (in $) is given by: TC= 30*Q* + 80000 TC= 30*1050 + 80000 TC= 111500 Profit (in $) is obtained by: = TR TC = 141750 111500 = 30250 3: Hot Chocolate Snow cones Anna 6 16 Elsa 16 20 It is clear from the above table that Elsa has absolute advantage in producing both cups of hot chocolate and snow cones in an hour. The opportunity cost of producing 1 cup of hot chocolate per hour is 2.66 for Anna. The opportunity of producing 1 cup of hot chocolate per hour is 1.25 for Elsa. The opportunity cost of producing 1 snow cone per hour is 0.375 for Anna. The opportunity cost of producing 1 snow cone per hour is 0.8 for Elsa. Since the opportunity cost of producing 1 cup of hot chocolate for Elsa (1.25) is lower than that of Anna (2.66), Elsa has comparative advantage in producing hot chocolate per hour. And since the opportunity cost for producing 1 snow cone per hour for Anna (0.375) is lower than that of Elsa (0.8), Anna has comparative advantage in producing snow cones per hour. (Absolute Advantage Versus Comparative Advantage, 2015) Hot chocolate Snow cones Anna 15 8 Elsa 32 20 Clearly Elsa has absolute advantage in producing hot chocolate and snow cones. The opportunity cost of producing 1 snow cone per 3 hour is 1.85 for Anna The opportunity cost of producing 1 snow cone per 3 hour is 1.6 for Elsa. Since opportunity cost for Elsa is lower than that of Anna, Elsa has comparative advantage in producing snow cones. The opportunity cost of producing 1 cup of hot chocolate per 3 hour is 0.53 for Anna. The opportunity cost of producing 1 cup of hot chocolate per 3 hour is 0.625 for Elsa. Since opportunity cost for Anna is lower than that of Elsa, Anna has comparative advantage in producing hot chocolate. Anna specializes in hot chocolate and will sell it to Elsa. On the other hand Elsa specializes in snow cones and will sell it to Anna. In this way they will develop trading relationship be better off. 4: Purchasing a Tig Welder would involve an opportunity cost of the spending $90,000 immediately. There will be a loss of annual interest rate on $90,000 which is 0.05*90,000 = $4500. If $90,000 was lent out then $4500 would have been gained. But purchasing this welder would save only $700 in labor costs per year forever which can save a lot of money in the long run. Hence, this investment can be made. By purchasing a three-dimensional printer, $6500 will be incremented in the revenue per year. But by lending $80,000, an interest of (0.05*80,000) $4000 would have been obtained. This interest rate of return is much lower than the incremental revenue. Thus this investment must be made. By lending out $25000, a return of (1.05*25000) $26250 will be earned. But by organizing this six-sigma training, there will be a one time savings of $26000. Hence, it is not advisable to make this investment. By spending $5000, an interest of $250 is lost and by spending $12000 for the next year, $600 is lost. If $17000 were lent out for two years then there would have been a gain of $18700 which is higher than the return from the completion of the six sigma training of $16000 for one time. Thus, this investment must not be made. 5: A fall in the cost of screen manufacturing by 15%, increases the supply. As producers are now able to sell more quantities of good at the same price. The cost reduction also leads to increase in profit. (net, 2015) Uncertainty regarding the nutritional value of drinking carbonated soda reduces the demand for the same at the existing price. The exchange rate of Canadian dollar in terms of US dollar has increased which implies that Depreciation of Canadian dollar had taken place which implies Canada will now import less and export more. Thus a situation of excess supply arises. (CMS Forex, 2015) The popularity gained by the one inexpensive beef brisket had led to increased demand. This increased demand has resulted in increase in price of beef brisket based on The Wall Street Journal. (CAMPOY and KOPPEL, 2015) References Absolute Advantage Versus Comparative Advantage. (2015).Boundless. [online] Available at: https://www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/absolute-advantage-versus-comparative-advantage-493-12589/ [Accessed 22 Feb. 2015]. Ariely, D. (2011).Predictably irrational. [Kennett Square, Pa.]: Soundview Executive Book Summaries. CAMPOY, A. and KOPPEL, N. (2015). Brisket Was Cheap and Delicious; Now Its Expensive and You Have to Wait in Line.The Wall Street Journal. [online] Available at: https://www.wsj.com/articles/brisket-was-cheap-and-delicious-now-its-expensive-and-you-have-to-wait-in-line-1423180291 [Accessed 22 Feb. 2015]. CMS Forex, (2015).Supply and Demand in Currency Trading. [online] Available at: https://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/supply-and-demand/ [Accessed 22 Feb. 2015]. Objectives for Chapter 8 Price Floors and Ceilings. (2015). 1st ed. [ebook] Available at: https://www2.palomar.edu/users/llee/101Chapter08.pdf [Accessed 22 Feb. 2015]. Png, I., Lehman, D., Cheng, J. and Png, I. (2008).Study guide to accompany Managerial economics, third edition, by Ivan Png and Dale Lehman. Malden, MA: Blackwell, Pub. Tutor2u.net, (2015).Tutor2u - Market Supply. [online] Available at: https://tutor2u.net/economics/content/topics/demandsupply/supply.htm [Accessed 22 Feb. 2015].