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BM1101-w02 Problem Set 2

The document outlines a problem set for a Business Economics course, focusing on interdependence and gains from trade between American and Japanese workers in car and grain production. It includes tasks such as calculating production totals, opportunity costs, and the effects of trade on both countries' economies. Additionally, it discusses Tesla's production possibilities frontier regarding electric cars and energy storage pods, emphasizing profit maximization and addressing shareholder concerns.

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adri baigorri
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9 views2 pages

BM1101-w02 Problem Set 2

The document outlines a problem set for a Business Economics course, focusing on interdependence and gains from trade between American and Japanese workers in car and grain production. It includes tasks such as calculating production totals, opportunity costs, and the effects of trade on both countries' economies. Additionally, it discusses Tesla's production possibilities frontier regarding electric cars and energy storage pods, emphasizing profit maximization and addressing shareholder concerns.

Uploaded by

adri baigorri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Business Economics

BM1101
Problem set 2

Chapter 3: Interdependence and the gains from trade \ Problems and applications #2 (edit)
American and Japanese workers can each produce 4 cars a year. An American worker can
produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a
year. To keep things simple, assume that each country has 100 million workers.
a. Produce a table listing the total production of cars and grain in each country when their
workforce is fully allocated to car production or fully allocated to grain production.
b. Graph the production possibilities frontiers for the American and Japanese economies. *
c. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is
the opportunity cost of a car? Of grain?
d. When there is no trade between both countries, half of each country’s workers produce
cars and half produce grain. What quantities of cars and grain does each country
produce?
e. Compared to the outcome without trade described above, provide an example in which
trade between the two countries makes both countries better off. In your example, one
country should export cars and import grain, while the other country exports grain and
imports cars. That is, trade amounts to an exchange of a certain quantity of cars and grain
between countries that is feasible (within the PPF of each country) and benefits both.

Tesla’s production possibilities frontier


Consider Tesla’s production possibilities frontier. Tesla can deploy the lithium-ion battery
cells assembled in its Gigafactory in either electric cars or in energy storage pods for homes.
Assume for simplicity that a car requires 10 cells and a pod requires 25 cells.
a. Plot Tesla’s production possibilities frontier if the Gigafactory had a production capacity
of one million cells per year. *
b. If Tesla can make a profit of £1000 per car and £2000 per pod, how should Tesla allocate
its cell production to maximize profits?
c. Complement your answer to question B using your plot: calculate the opportunity cost (in
terms of cars) of allocating cells to pods. What is the opportunity cost in terms of lost
profits per pod?
d. Imagine you are Tesla’s CEO, Elon Musk, and you face the following question in a
shareholder meeting: “Tesla is in a unique position to benefit from strong demand in the
home energy storage market. Why are you ignoring this opportunity by not increasing
production of energy storage pods?” How would you answer?**

* Suggestion:When producing a plot, always make sure to label the two axes, label the
curves included in the plot (in this case the PPF), as well as label on each axis the values
corresponding to any points highlighted in the plot (such as the intersection of the PPF with
each axis, or any point highlighted on the PPF). For completeness, you can also include a
couple of sentences beside your plot identifying what is depicted and what are the main
implications.

** Suggestion:A strong economics argument should build on economics principles (in this
case the concepts present in the PPF), be self-contained (by identifying the concepts used
and providing intuition on why and how they apply), focused (by not referencing concepts
that are not needed or are tangential to the example), and concise (by not repeating
elements or extending the discussion beyond what is needed to make the point).

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