1. (a) Canada has an absolute advantage in producing both muffin and bacon. Note that when compared with England, Canada can produce more of each good per hour.


(b) For England, the opportunity cost of producing each bacon is 2 muffins. But for Canada the opportunity cost of producing each bacon is 1 muffin. Since canada can produce bacon at a lower opportunity cost, Canada has a comparative advantage in bacon production. On the other hand, England can produce muffins at a lower opportunity cost than Canada. Note that while the opportunity cost of producing muffin is 1/2 bacon for England, it is one whole bacon for canada.

(c) Start with a self sufficiency case where each country (for example) needs 200 bacons and 200 muffins.

Now England needs 6 hrs while Canada 2hrs to produce the required amounts. The total output will be 400 muffins and 400 bacons. Then let them specialize in the production of commodities that they have comparative advantage and ask them to work the same number of hrs as in the self sufficiency case. England can produce 600 muffins in 6 hrs while Canada can produce 400 bacons. Note that the total output has increased by 200 muffins.
 
 

2. The production possibilities curve (frontier) has a bowed-out shape indicating that opportunity cost of production increases as you produce more and more of a certain commodity. The reason for this bowed-out shape is the specialization of resources (inputs) in the production of certain commodities (i.e., they are not perfectly adaptable). As the economy produces more and more of a certain commodity, it pulls out inputs that are specialized in the production of other outputs to produce more of a certain output. This increases the opportunity cost of production.

 

 

3. (a) Long run is a time period long enough that a firm can alter the levels of all the factors of production. It is a time period over which all the inputs are variable inputs meaning that a firm can modify its existing facility or built a new one.

(b) Short run is a time period over which one or more factors of production is fixed. It is a time period over which a firm can not modify an existing facility or built a new one.
 
 

(c) Fixed costs are costs that do not change as the level of activity changes.
 
 

(d) Fixed inputs are those inputs whose levels do not change as the level of the activity changes in the short run.
 
 

(e) variable inputs are those inputs whose levels vary with the level of activity.
 
 

4.

1. Principle of opporunity cost
2. Marginal principle
3. Principle of diminishing returns
4. Spill-over principle
5. Reality Principle

Please see the text-book for the definitions.
 
 

5. The production possibilities are all the combinations of goods that can beproduced with the limited resources of the economy. It includes all these points which are in the attainable region as well as all those points on the production possibility frontier (i.e., efficient ones). Production possibility frontier is the curve itself. It is the boundary to the production possibilities and shows all the EFFICIENTLY produced combinations of goods with the limited resources.

 

 

6. You would study economics up to the point where MB of studying an extra hr is equal to its MC. While measuring marginal cost of studying an extra hr you should look at what you are giving up of your next best alternative to studying for economics an extra hr.

7. It depends. If the firm has reached the point of diminishing returns, I would not expect each additional worker to contribute to the total output as much as the previous worker(s).