Answer to Question #295374 in Microeconomics for Marissa

Question

Steve can bake either 4 loaves of bread or 12 dozen cookies a day. Sarah can bake either

4 loaves of bread or 8 dozen cookies a day.

a. Show the production possibilities frontiers for Steve and Sarah

b. Suppose trade is not allowed between Steve and Sarah and as a result, both Steve and

Sarah spent half a day (12 hours) baking bread and the other half a day baking cookie.

Show both the production and consumption bundles for Steve and Sarah on their

respective PPFs, when trade is not allowed between Steve and Sarah.

c. Show, using production possibility frontiers in (a), that Steve and Sarah would be

better off specializing in their baking activities and then trading, rather than baking

only for themselves. Be specific and state the production and consumption bundles

with trade.

Answer 1

Production possibility curve : The production possibility frontier or the production possibility curve is a graphical presentation that shows all the possible combination of goods that a producer can produce with the given resources.

Production possibility frontier

1) Following below drawn is the production possibilities frontiers for Steve and Sarah :

PPF when trade is not allowed

2) When trade is not allowed;

Consumption of steve = 2 Loaves of bread and 6 cookies

Consumption of steve = 2 Loaves of bread and 2 cookies

Following below is the graphical presentation for the same;

3) For Steve the opportunity cost for bread is,

4 Bread = 12 cookies

1 Bread = 3 cookies

For Sarah the opportunity cost for bread is,

4 Bread = 4 cookies

1 Bread = 1 cookies

For Steve the opportunity cost for cookies is,

12 cookies = 4 Bread

1 cookies = 1/3 Bread

For Sarah the opportunity cost for cookies is,

4 cookies = 4Bread

1 cookies = 1 Bread

Lower the opportunity cost higher the comparative advantage .

Steve has a comparative advantage in producing cookies whereas Sarah has a comparative advantage in producing bread .

Thus, Steve should produce cookies and Sarah should produce bread

Total production in economy: 12 cookies and 4 bread

Earlier: Total consumption: 4 Bread 8 cookies

Now, total consumption: 4 Bread 12 cookies

Hence the economy is better off .