Question

4. An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and can pro- duce two services: mowing lawns and washing cars. In an hour, Larry can either mow one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can either mow two lawns or wash one car. a. Calculate how much of each service is produced under the following circumstances, which we label A, B, C, and D: All three spend all their time mowing lawns. (A) All three spend all their time washing cars. (B) All three spend half their time on each activity. (C) Larry spends half his time on each activity, while Moe only washes cars and Curly only mows lawns. (D) b. Graph the production possibilities frontier for this economy. Using your answers to part a, identify points A, B, C, and D on your graph. c. Explain why the production possibilities frontier has the shape it does. d. Are any of the allocations calculated in part a inefficient? Explain.

Answer 1

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Answer (a):

Only Lawns as ouptut

Productivity/hr Lawns Total for 10 hrs b = ax 10 10 1 Larry Moe Curley Total lawns 20 40

Only Washes as ouptut

Larry Moe Curley Total Washing hrs Washing cars Productivity/hr Total for 10 hrs b = ax 1 10 20 1 40 10

Half of Lawn and Washes (20 Lawns + 20 Washes)

Lawn Washing Cars Lawn Car Wash Productivity/hr Total for 5 hrs Productivity/hr Total for 5 hrs a b= ax 5 hrs c d = cx 5 hrs 10 Larry Moe Curley C=Total wash together 20 20

Based on Productivity

Lawn Washing Cars LAW Car Wash Productivity/hr time spent Total for 10 hrs Productivity Total for 10 hrs Larry Moe 20 Curley De Total wash together 20 25

Answer (b):

Lawns moved PPF 5 10 15 20 25 30 35 40 Cars Washed

Answer (c): The production possibilities frontier has bowed outward. Its shape is determined by the opportunity cost of laws moved and cars washed. Opportunity cost is the slope of production possibilities curve. As the factors of production are not perfect substitutes their opportunity costs vary along the curve, giving a bowed out shape. If the factors are perfectly substitutable than the curve will be linear and downwardly sloping. Answer (d): The allocation labelled 'c' is inefficient, calculated in part (a). This is because the services of Moe and curly are utilized inefficiently i.e., Moe is efficient if utilized in washing cars but instead he moved lawns where he is inefficient curly is efficient if he moved the lawns. But he washed cars where he is inefficient. If they are utilized based on their productivity or efficiency, than there will be higher production together, this is seen in case D of option A