Chapter 2

1. a) Graph
Ethanol (barrels per day)
70
64
54
40
22
0

Food Crops (tons per day)

0
1
2
3
4
5
Brazil`s PPF

PPF itself illustrates scarcity because it`s needed to scarify one product production in
order to get more of another. That`s why in this case it can be seen from the graph above that
we need to decrease production of ethanol to increase production of food crops..
b) If Brazil produces 40 barrels of ethanol a day, it should produce 3 tons of food crops
per day to achieve a production efficiency.
c) Tradeoff in Brazil happens due to the fact that resources and technologies are limited.
That`s why in order to produce more of one good the production of another good must be
shifted. So, to increase production of food crops the production of ethanol should be
decreased, achieving a tradeoff.
d) If Brazil increases its production of ethanol from 40 to 54 barrels per day, so it should
decrease production of food crops from 3 to 2 tons per day, so it will have opportunity cost of
food production equivalently to 1 ton per day.
e) If Brazil increases its production of food crops from 2 to 3 tons per day, so it must
lower production of ethanol from 54 to 40 barrels per day, then it has an opportunity cost
equivalent to 14 barrels per day of ethanol.
f) The opportunity cost of these two products are relational. So, if opportunity cost of
additional 1 ton of food crops is 14 barrels of ethanol and opportunity cost of additional 14
barrels of ethanol is 1/14 tons of food crops.
g) If to look at the graph, it can be seen that, for example, increasing the production of
ethanol from 22 to 40 barrels per day it has the opportunity cost 1/18 tons of food crops per
barrel of ethanol, then of to raise from 40 to 54 barrels per day the opportunity cost is 1/14
tons of food crops per barrel of ethanol. The PPFs graph is bowed outward illustrating
increase of opportunity cost.

10.
a) Brazil has a comparative advantage producing ethanol from sugar. This happens so,
because Brazil there are 83 cents per gallon worth other goods and services, while in USA
the cost of ethanol per gallon is 1.14 dollars that worth other goods and services. So, the
opportunity cost is lower in Brazil.
b) If there are no changes with technologies (not improved), so that there will be no
changes in shifting production of ethanol and other goods, the opportunity cost in USA will
increase as the production of ethanol will increase.

c)

Trade line

US PPF

d)

Trade

Brazilia
n PPF

e) US trades with Brazil, buying from it ethanol because Brazil produces ethanol at a
lower price thereby it is more benefit for USA to buy it from Brazil. In figure (c) USA
initially produced 400 billion units of other goods and services and 10 million gallons of
ethanol. After specializing in the production of other goods and services USA produces 800
billion units of G&S. By trading 200 billion of G&S for 20 million gallons of ethanol, the US
consumes 600 billion units of G&S and 20 million gallons of ethanol. The consumption of
both other goods and services and ethanol improved in USA.
The same happens in Brazil. In figure (d) it can be seen that it produced and consumed 200
billion units of G&S and 20 million gallons of ethanol. After specializing in ethanol

producing 50 million gallons of ethanol it trades with USA 20 million gallons of ethanol for
200 billion units of G&S. Brazil consumes 200 billion units of G&S and 30 million gallons
of ethanol. Thereby the consumption in Brazil of both other goods and services and ethanol
increased.

f) The USA has achieved production efficiency in its manufacture of ethanol, goods and
services, because owners of the firms have a property right to their firms` profit.
g) The USA doesn`t allow a free trade in ethanol, so that the cost in USA for ethanol is
higher than in Brazil.

19.
a) Before the blockade the South had a comparative advantage in cotton.
b)

c) The South was consuming at a point outside its PPF. For South it was less
expensive to produce cotton and it had a good trade in exchange for manufactured
goods and food, which would have been relatively expensive for the South to
produce. So, South had benefit from trade.

d)

After blockade South could no longer trade with others, so it must have been raise
the production of manufactured items, so it decreased production of cotton. So, this
situation forced the South`s consumption point lie on PPF graph. On the graph it can
be seen that its production and consumption point become point C.
e) The Civil War increased the opportunity cost of food and manufactured
goods. However it decreased the opportunity cost of cotton.
f) The graph above shows changes. The opportunity cost of cotton decreased
because the blockade lead the South to produce less cotton, moving from initial
production point a to final production point c. Moving along a PPF, as less of a good
is produced, its opportunity cost falls. The opportunity cost of food and
manufactured goods increased because the South increased the amount of food
and manufactured goods it produced. Moving along a PPF, as more of a good is
produced, its opportunity cost rises.