Tom and Abby produce rackets and balls. The tables show their production possibi

Question

Tom and Abby produce rackets and balls. The tables show their production possibilities. Tom allocates all his resources and produces 2 rackets and 4 balls on hour. Abby allocates all her resources and produces 2 rackets and 8 balls an hour. Tom and Abby decide to specialize and trade. specializes in rackets and produces . specializes in balls and produces Tom; 2 rackets; Abby; 8 balls Abby; 4 rackets; Abby; 16 balls Abby; 2 rackets; Tom; 16 balls Abby; 4 nickels; Tom; 8 balls Tom; 4 rackets; Abby; 16 balls The number of balls produced by . If Tom and Abby specialize and trade 1 racket for 4 balls, gets rackets from for less than it costs to produce them, and gets balls from for less than it costs to produce them.

Explanation / Answer

Yes, the picture has all information. Please see below:

(a)

Opportunity cost (OC):

(a) Tom

OC of racket = 4/2 = 2 balls

OC of ball = 2/4 = 0.5 racket

(b) Abby

OC of racket = 8/2 = 4 balls

OC of ball = 2/8 = 0.25 racket

Tom make make rackets at a lower OC than Abby can (2 < 4), Tom will specialize in rackets. So Abby will specialize in balls. So, Tom makes 4 rackets (Tom's maximum when he makes 0 balls) & Abby makes 16 balls (Abby's maximum when she makes 0 rackets).

(b)

Before specialization, Total number of balls = 4 (Tom) + 8 (Abby) = 12

After specialization, number of balls = 16 (Only Abby)

Increase in balls = 16 - 12 = 4

(c)

Trade is mutually beneficial as long as relative price of 1 racket lies between 2 & 4 balls. So, If they trade 1 racket for 4 balls, Abby gets rackets from Tom at less that what if costs her, and Tom gets balls from Abby at less that what it costs him.

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