Question

(10 points) Consider a simple exchange economy with two people: Bob and Jake. Bob and Jake both have ten hours of time available. The can use their time to do one of two things: make pancakes or make hamburgers. Bob can make four hamburgers in an hour or one pancake in an hour. Jake can make two pancakes in an hour or one hamburgers in an hour. a.) Draw Bob and Jake's PPFs with hamburgers on the x-axis. Give equations for both PPFs in y=mx+b form. HD b.) Give an example of terms of trade at which Bob and Jake will be able to trade with each other? Why is trade possible at your proposed terms of trade?

Answer 1

A) PPF for Bob

As H on X axis , so Slope of PPF = Opportunity cost of production of H in terms of P

For Bob, to Produce 1 P, give up 4 H

Opportunity cost of 1 H = .25P

So Slope is = -1/4

eqn: Y = 1 - .25X

graph

(0, 1) Bob ppf -0.5 2H (4,0)

For Jake

Opportunity cost of 1 H = 2P

Slope =- 2

eqn : Y = 2 - 2X

Graph

(0,2) jake ppf -1-5 -0:54 (1,0) 0 0.5 H

B)

Let TOT : 1 P= 2T

Then, then if Jake sells 1 P, it gets 2 T

So Consumption point : ( P, T) = (1,3)

For Bob

Gets 1 P for 2T

Consumption point : (P,T) = (2,2)

So both are better off, bcoz these points don't lie on ppf