Question

1. Draw the Production Possibilities Frontier for the following table and label all points Person A Possibility Pizza Hamburgers 25 20 15 10 6 10 • What is the opportunity cost of 1 Pizza? What is the opportunity cost of 1 hamburger? Label three inefficient points and 3 unattainable points 2. Draw the Production Possibilities Frontier and label all points: Person B Possibility Hamburgers 10 8 B Piura 5 10 15 20 25 C D What is the opportunity cost of 1 Pizza? What is the opportunity cost of 1 hamburger? Does Person B have an absolute or comparative advantge to Person A? Does Person A have an absolute or comparative advantage to Person B? How many Pizzas/Hamburgers should Person A & B produce?

Answer 1

1) The PPF of person A is given below.

Peron A PPF Hamburger 1 2 4 6 Pizza 8 10 12

The opportunity cost gives the units of 1 good sacrificed to gain an additional unit of the other good.

Here, 2 pizzas are sacrificed for 5 hamburgers.

Cost of 2 pizza = 5 hamburgers

Cost of 1 pizza = 5/2 = 2.5 hamburgers

Opportunity cost of 1 pizza = 5/2 = 2.5 hamburgers

Opportunity cost of 1 hamburger = 2/5 pizza

Inefficient points are the ones that do not use resources efficiently. These are ponts X, Y and Z.

Unattainable points are outside the PPF. These are P,Q and R.

2)

Peron B PPF Hamburger 1 5 10 15 20 25 30 | Pizza

• The opportunity cost gives the units of 1 good sacrificed to gain an additional unit of the other good.

Here, 5 pizzas are sacrificed for 2 hamburgers.

Cost of 5 pizzas = 2 hamburgers

Cost of 1 pizza = 2/5 hamburgers

Opportunity cost of 1 pizza = 2/5 hamburgers

Opportunity cost of 1 hamburger = 2.5 pizzas

• Person A can produce hamburgers more efficiently as his opportunity costs are lower.

Person B can produce pizzas more efficiently as his opportunity costs are lower.

Thus, A has comparative advantage in producing hamburgers and B in producing pizzas.

• Person A should produce possibility A with 25 hamburgers and 2 pizzas.

Person B should produce possibility E with 25 pizzas and 2 hamburgers.