4. Dawn Key is a very successful businesswoman. She is also skilled in the domestic arts. Though she could clean her house in two hours, she prefers to hire a cleaning lady who spends five hours doing the same job. Though she is a skilled cook, she hires a caterer when she hosts a party. The caterer takes ten hours to prepare the food, whereas Ms. Key could do the same work in only six. Why do Ms. Key's actions make sense in terms of comparative advantage?

5. Suppose that Crusoe can either catch 10 fish or gather 10 coconuts in 10 hours, and Friday can catch either 8 fish or 4 coconuts every 10 hours.

a) In terms of hours, what is the cost of fish to Friday? What is the cost of fish to Crusoe?
b) In terms of hours, what is the cost of coconuts to Friday? What is the cost of coconuts to Crusoe?
c) Explain why this is not the way an economist would measure costs. What would the cost of fish and coconuts be to Friday and Crusoe under this alternative measure?
d) Suppose that before trade, Friday and Crusoe both spend five hours fishing and five hours gathering coconuts. What will their production and consumption bundles look like?
e) Explain the changes they can make so they both end with more consumption.

6. Although Adam Smith advocated free trade, David Ricardo was the first to clearly explain the idea of comparative advantage. For his explanation, he began with production costs similar to those shown in the following table.

 England Portugal 1 barrel of wine requires 1 man-day 1 barrel of wine requires 2 man-days 1 bolt of cloth requires 1 man-day 1 bold of cloth requires 3 man-days

If it took 3 man-days to produce a barrel of wine in England instead of 1, there would clearly be gains from trade. England would then have an absolute advantage in cloth, and Portugal would have an absolute advantage in wine. Ricardo, however, said that with the numbers above, even though England could produce both items with less labor, there were gains from trade. Let's see if you can re-create his reasoning below.

a) Using these data, compute the opportunity costs of wine and cloth below:

 In England In Portugal To get 6 barrels of wine, it must give up bolts of cloth. To get 6 barrels of wine, it must give up bolts of cloth. To get 6 bolts of cloth, it must give up barrels of wine. To get 6 bolts of cloth, it must give up barrels of wine.

(Hint: Producing 6 barrels of wine requires how many man-days? If these man-days are taken away from cloth production, how much cloth production is lost? Using 6 keeps fractions out of the results and makes computation easier.)

b) Based on the opportunity costs you computed, which country produces wine more cheaply? Which cloth?

c) Suppose that 6 barrels of wine trade for 5 bolts of cloth. (This is the same as 6 bolts of cloth trading for 7 1/5 barrels of wine.) Would England find it cheaper to buy wine or produce it? To buy cloth or produce it? Would Portugal find it cheaper to buy wine or produce it? To buy cloth or produce it? Could mutually advantageous trade take place?

d) Suppose that 6 barrels trade for 7 bolts. Would England find it cheaper to buy wine or produce it? To buy cloth or produce it? Would Portugal find it cheaper to buy wine or produce it? To buy cloth or produce it? Could mutually advantageous trade take place?