Question

Suppose Martha and Julia both work at a bakery making bread and muffins. In an hour, Martha can either make 10 loaves of bread or 40 muffins, while Julia can either make 12 loaves of bread or 60 muffins. Both Martha and Julia work 8 hours a day.

a. Draw Martha's daily PPC.

Instructions: Use the tool provided to draw Martha's PPC curve. Plot only the endpoints and locate these endpoints on the axes of the diagram.

b. Draw Julia's daily PPC.

Instructions: Use the tool provided to draw Julia's PPC curve. Plot only the endpoints and locate these endpoints on the axes of the diagram.

c. What is the opportunity cost to each of making one loaf of bread?

Martha's opportunity cost of making a loaf of bread:  muffins

Julia's opportunity cost of making a loaf of bread:  muffins

d. What is the opportunity cost to each of making one muffin?

Instructions: Enter your responses rounded to two decimal places.

Martha's opportunity cost of making a muffin:  loaves of bread

Julia's opportunity cost of making a muffin:  loaves of bread

e. Who has the comparative advantage in making bread?

• Neither

• Julia

• Martha

f. Who has the absolute advantage in making bread?

• Julia

• Neither

• Martha

g. Suppose you are the owner of the bakery. If Julia and Martha are currently both spending all of their time making muffins, then which of them should you ask to start making bread?

• Martha because her opportunity cost of making bread is higher than Julia's.

• Julia because her opportunity cost of making bread is lower than Martha's.

• Martha because her opportunity cost of making bread is lower than Julia's.

• Julia because her opportunity cost of making bread is higher than Martha's.

Answer 1

Opportunity cost is the value of the next best alternative.

	Loaves of bread in terms of opportunity cost of muffins	Muffin in terms of opportunity cost of loaves of bread
Martha	40/10=4	10/40=1/4
Julia	60/12=5	12/60=1/5

Martha has a comparative advantage in baking loaves of bread because she has to give up only 4 muffins, whereas, Julia has to give up 5 muffins.

Julia has comparative advantage in baking muffins since it costs only 1/5th of a loaf of bread, whereas, it costs 1/4^th for Martha.

c. What is the opportunity cost to each of making one loaf of bread?

Martha's opportunity cost of making a loaf of bread: 4 muffins

Julia's opportunity cost of making a loaf of bread:  5 muffins

d. What is the opportunity cost to each of making one muffin?

Martha's opportunity cost of making a muffin: ¼ of loaf of bread.

Julia's opportunity cost of making a muffin:  1/5 of loaf of bread.

e

Martha has a comparative advantage in baking loaves of bread because she has to give up only 4 muffins, whereas, Julia has to give up 5 muffins.

f) Julia has an absolute advantage in baking loaves of bread since she can bake more loaves of bread than Martha.

g) Martha, since her opportunity cost is lower in baking loaves of bread.