Question

Robinson Crusoe can bake 10 loaves of bread (B) in one hour or peel 20 potatoes (P). Friday can bake 5 loaves of bread (B) in an hour or peel 30 potatoes (P).

a) What is the opportunity cost of producing 1 unit of bread and 1 unit of potato by Robison Crusoe and Friday?

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b) Write PPF equation for Robinson Crusoe and Friday

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c) If perfect competition prevails (Price = marginal cost), determine the price of each unit of bread and potato.

Answer _____________________________________________________________________

d) Determine comparative advantage of Robinson Crusoe and Friday.

Answer 1

Solution:

a.). What is the opportunity cost of producing 1 unit of bread and 1 unit of potato by Robison Crusoe and Friday?

The opportunity cost of producing 1 unit of bread by Robinson Crusoe$= \frac{20}{10}= 2 \;potatoes$

The opportunity cost of producing 1 unit of bread by Friday $= \frac{30}{5} = 6 \;potatoes$ = 30/5

The opportunity cost of producing 1 unit of potato by Robinson Crusoe$= \frac{10}{20} = \frac{1}{2}\;bread$

The opportunity cost of producing 1 unit of potato by Friday $= \frac{5}{30}=\frac{1}{6} \;bread$

 

b.). The PPF equations for Robinson:

$B=10-2p$

$P=20-\frac{1}{2}b$

      The PPF equations for Friday:

$B=10-6p$

$P=30-\frac{1}{6}b$

c.). In perfect competition, the unit price of bread and potato will be:

     Robinson: Bread $=\frac{1}{2}$     Potato $=2$

     

Friday:      Bread $=\frac{1}{6}$      Potato $=6$

d.). Robinson has the comparative advantage of producing breads since it must give up only 2 potatoes to produce a bread while Friday must give up 6 potatoes to produce a bread.

Friday has the comparative advantage to produce potato since it must give up only $\frac{1}{6}$ bread to produce a potato while Robinson has to give up $\frac{1}{2}$ bread to produce a potato.