Economics Exam Preparation Notes

Production Possibilities Frontier (PPF)

• Represents the maximum feasible output combinations of two goods (e.g., agricultural goods A, capital goods C).

• According to the law of increasing opportunity costs, the PPF is concave to the origin.

• Example Points on the PPF:

  • Bundle (A, C) = (100, 0) -> Resources fully allocated to agricultural goods.

  • Bundle (A, C) = (50, 40) -> Mixed allocation of resources.

Questions on Farms (Bianca and Rosa)

1. Production Capacity and PPCs

   • Bianca's Production:

     • Gallons of Milk (M): 1 gallon/hour

     • Pounds of Apples (A): 1 pound/hour

     • PPC:

     • X-intercept: (4,0)

     • Y-intercept: (0,4)

     • Slope: -1 (each good has equal opportunity cost)

   • Rosa's Production:

     • Gallons of Milk: 2 gallons/hour

     • Pounds of Apples: 4 pounds/hour

     • PPC:

     • X-intercept: (2,0)

     • Y-intercept: (0,8)

     • Slope: -2 (twice the opportunity cost of milk for apples)

2. Opportunity Costs

   • For Bianca:

     • Opportunity Cost of 1 pound of Apples: 1 gallon of Milk

     • Opportunity Cost of 1 gallon of Milk: 1 pound of Apples

   • For Rosa:

     • Opportunity Cost of 1 pound of Apples: 0.5 gallons of Milk

     • Opportunity Cost of 1 gallon of Milk: 2 pounds of Apples

3. Comparative and Absolute Advantages

   • Comparative Advantage:

     • Bianca has a comparative advantage in Apples.

     • Rosa has a comparative advantage in Milk.

   • Absolute Advantage:

     • Rosa has the absolute advantage in both goods due to higher output with the same resources.

4. Gains from Trade

   • Yes, gains from specialization exist:

     • Bianca should specialize in producing apples, Rosa in milk.

5. Joint PPC and Time Allocation

   • Draw the combined PPC, showing the specialization points.

   • Reallocate time for efficiency gains: e.g., 3 hours on Apples + 1 hour on Milk can increase total output.

Siblings (Fiona and Henry)

1. PPF for Housework

   • Fiona:

     • Time to Vacuum = 10 minutes/room

     • Time to Laundry = 15 minutes/load

     • PPF:

     • X-intercept: 6 loads (Vacuum only)

     • Y-intercept: 4 rooms (Laundry only)

   • Henry:

     • Time to Vacuum = 5 minutes/room

     • Time to Laundry = 10 minutes/load

     • PPF:

     • X-intercept: 12 loads (Vacuum only)

     • Y-intercept: 6 rooms (Laundry only)

2. Opportunity Costs

   • Fiona can produce more of either but costs differ significantly from Henry.

   • Opportunity costs must be calculated from their respective PPFs.

3. Gains from Specialization

   • Determine who specializes in Vacuuming vs Folding Laundry to maximize efficiency based on comparative advantage.

Fred and Roy Trading Scenario

1. PPFs for Wheat and Pork

   • Fred: W=10-2P

   • Roy: W=4-( rac{1}{4})P

   • Label all intercepts and slopes on a combined graph.

2. Opportunity Costs

   • Calculate both Fred and Roy’s opportunity costs for each product.

3. Consumption Before Trade

   • Plot points for Fred and Roy’s original production.

4. Efficiency Through Specialization and Trade

   • Show trading leads to higher total consumption for both.

5. Combined PPF

   • Draw the combined PPF, noting specialization points indicating gains from trade.

Production Scenarios (Fred and Rachel)

1. Comparison of PPFs

   • Rachel's PPF given by M=8-2P

   • Fred's PPF given by M=1-( rac{1}{3})P

2. Specialization and Gains

   • Even with Rachel's absolute advantage, mutual specialization sector shows gains.

3. Final Combined PPF

   • Graph combined PPF illustrating total specialized production outputs.