4. Your roommate Pat decides to help with the party. The amounts of brownies and

Question

4. Your roommate Pat decides to help with the party. The amounts of brownies and cake which can be produced in an hour (if all resources are devoted to that good) are shown by the following table: YOU PAT BROWNIES PER HOUR 60 28 CAKE PER HOUR 2 1 a. Who has an absolute advantage in producing brownies? Cake? b. For you, what is the opportunity cost of brownies? Of cake? c. For Pat, what is the opportunity cost of brownies? Of cake? d. Should you and Pat specialize? Who should produce what? e. Suppose that you have so many guests that you have to split up the party into two rooms. You throw one party and Pat throws the other. What are the terms of trade? (At what rate would you each be willing to trade?) f. Using graphs for both you and Pat, show that trade allows each of you to achieve a point on your consumption possibilities curve which is greater than your production possibilities curve. Be sure to label all curves and axes. g. What is this principle called?

Explanation / Answer

1. a. Abs advantage is you (60) brownies per hour and you 2 cakes per hour b. The opportunity cost of 1 brownies is 1/60 cake, the opportunity cost of 1 cake is 60 brownies c. The opportunity cost of 1 brownies is 1/28 cake, the opportunity of of 1 cake is 28 brownies. d. Yes, you produce the brownies and pat produces the cakes. e. Terms of trade would be like 30 brownies for 1 cake f. draw ppf curve, quantity of brownies produced on y axis and quantity of cake produced on x axis. 88 is max brownies on y axis and 3 cakes is maximum cakes on x axis. principle is called pareto efficiency or pareto optimal.

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