ECO 204 In-Class Problem Set 10
1. My wife and I enjoy preparing nice meals on the weekends. We make two meals on Saturday and two meals on Sunday. We have two chores: cooking meals and cleaning up after. It takes my wife one hour to cook and half an hour to clean. It's the opposite for me: it takes me half an hour to cook the same meal and an hour to clean.
A. Should we use a fair split? She makes 2 meals and cleans up on Saturday, I do the same on Sunday. How many hours will we each spend?
B. Draw a plot of our PPFs (i.e., budget lines) with Meals on the vertical axis and label point A.
C. My wife has an absolute advantage in cleaning while I have an absolute advantage in cooking. She suggests doing all the cleaning while I cook. That is, she will specialize in cleaning; I, cooking. Specialization occurs when I devote my physical and mental energy to the single task. How many hours will we each spend at our chores?
D. Label point T on the plot of our PPFs.
E. Draw expanded (dotted) PPFs through the point of specialization and point T.
F. What must our indifference curves look like if we require 1 meal = 1 cleaning?
2. Draw two PPFs, one for You and a PPF for Your Neighbor from the following table. Place Apples on the vertical axis and Cherries on the horizontal. Assume the opportunity cost of production is constant (i.e., not diminishing) so that both PPFs are straight lines.
You
Apples Cherries
20 pounds 0 pounds
30 pounds 0 pounds
Your Neighbor
Apples Cherries
0 pounds 20 pounds
0 pounds 60 pounds
A. What do constant (marginal) opportunity costs imply for your labor?
B. Assume in autarky you consume 8 apples and your neighbor consumes 42 cherries. How many cherries do you consume? How many apples does your neighbor consume? Label these points A on the PPFs.
C. Now label bundle T on your graph with 8 apples and 18 cherries. Is this combination feasible? Why or why not?
D. Which food do you have an absolute advantage in producing? Your neighbor?
E. If trade were allowed, which food should you specialize in producing? What rule are you following? To answer, calculate the opportunity costs of cherries for you and for your neighbor.
F. Assume trade is allowed and with trade you still consume 8 apples and your neighbor still consumes 42 cherries. Will you be better off? Will your neighbor? Illustrate this benefit from trade.
G. What is the price of apples that emerges with trade assuming it will be the average of your opportunity costs in terms of cherries (e.g., if apples cost 4 cherries for you and 2 cherries for your neighbor, the "price" of apples will be 3 cherries)?
