Econ 73-100/Kesten: Homework Assignment 2
Due: Monday 2/4/2013 (See syllabus for details on turning in)
1. Imagine a world with two people, a cattle rancher and a potato farmer (as in class).
Suppose both the rancher and the farmer can produce meat and potatoes at some constant opportunity cost. Depict hypothetical PPFs of both people (i.e., provide examples of graphs) that would illustrate the following situations: (If you think a situation is not possible, explain why.)
a. The farmer has an absolute and comparative advantage in meat production.
b. The farmer has an absolute advantage in meat production and a comparative advantage in potato production.
c. The farmer has an absolute advantage in both goods but no comparative advantage in any good.
2. Liz and Joe can both produce smoothies and salads. In her high-tech bar, it takes Liz
2 minutes to produce one smoothie or one salad. Joe’s bar is smaller and he has worse equipment than Liz, so he can make a salad in 2 minutes or a smoothie in 10 minutes.
Suppose they each have 1 hour to work. Currently, Liz splits her time equally between the two goods and Joe spends 50 minutes making smoothies and 10 minutes making salads. a. Who has an absolute advantage in the production of salads/smoothies?
__________________has the AA in producing salads
__________________has the AA in producing smoothies
b. Who has a comparative advantage in the production of salad/smoothie?
__________________has the CA in producing salads
__________________has the CA in producing smoothies
c. On the graphs below, draw Liz’s and Joe’s respective PPFs. (Be sure to label the intersection of the PPF with both axes.) smoothies smoothies
Liz
salads
Joe
salads
d. On the graphs above, mark Liz’s and Joe’s current (no-trade) production/consumption outcomes. Label Liz’s as A and Joe’s as B. Be sure to clearly indicate the number of salads and smoothies in each bundle.
2
e. Having heard about the gains from trade, Liz and Joe each decide to specialize completely in the production of the good they are best at. On the graphs above, mark
Liz’s and Joe’s complete specialization production points. Label Liz’s as A’ and Joe’s as B’. Be sure to clearly indicate the number of salads and smoothies in each bundle.
f. Fill in the table below to show how overall production of each good changed:
Production:
original no-trade
Production:
Change in production w/complete specialization
Smoothies
Salads
g. Propose two possible trading options (i.e., indicate who gives how much of which good in return for how much of which good) that would lead to mutually beneficial trades. (Remember that mutually beneficial trade means that the (final) consumption point for each person gives them more of at least one good and no less of the other compared to their initial no-trade outcome.)
Option 1:
Liz sells ____________________ and buys _____________________.
Joe sells ____________________ and buys _____________________.
