Principles of Microeconomics

EC-252-I01: Principles of Microeconomics

Spring 2019

Homework #2

Due Date: Wednesday, February 20, 2019

Name: _________________________________________________________

If you start to go wrong at any point on this homework assignment, much of the remainder of your work could also go wrong.  To mitigate this, I have provided some answers for you.  They are highlighted in yellow.  When you get to a yellow answer, make sure you agree with it before proceeding.

Leslie and Dan can produce chairs and tables according to the following labor production schedule:

Fill out the following table to display the numbers of chairs and tables each could produce in a 600-minute workday if they exclusively made just the one item.

Who has an absolute advantage in producing chairs?

Who has an absolute advantage in producing tables?

In order to make 1 table, how many chairs must Dan give up?

In order to make 1 table, how many chairs must Leslie give up?

Who has a LOWER opportunity cost to produce 1 table?

Leslie

Consequently, who has a comparative advantage in producing tables?

Leslie

In order to make 1 chair, how many tables must Dan give up?

In order to make 1 chair, how many tables must Leslie give up?

Who has a LOWER opportunity cost to produce 1 chair?

Consequently, who has a comparative advantage in producing chairs?

Absent a price system, who should specialize in making tables?

Leslie

Absent a price system, who should specialize in making chairs?

If Leslie makes all tables and Dan makes all chairs, how much is our 2-person society producing?

Chairs: Tables:

If Dan offered 1 chair in exchange for some amount of tables from Leslie, what amount of tables would be acceptable to Dan?

Tables > 1/3

If Dan offered 1 chair in exchange for some amount of tables from Leslie, what amount of tables would be acceptable to Leslie?

Consequently, what is the range of tables (from Leslie to Dan) that would need to be offered in exchange for 1 chair (from Dan to Leslie) that would be acceptable to both sides?

Leslie makes all tables.  Dan makes all chairs.  What do their pre-trade baskets look like in terms of (chairs, tables)?

Leslie: ( , ) Dan: (   24 ,   )

Leslie then trades 2 tables to Dan in exchange for 1 chair.  What do their post-trade baskets look like in terms of (chairs, tables)?

Leslie: ( , ) Dan: (   23 ,       )

Draw the individual PPFs for both Leslie and Dan below.  Be sure to label which PPF belongs to which player.  Also label the four endpoints with values.

Draw the societal PPF below.  Be sure to label which section of the PPF shows the contribution of which player.  Also label the two endpoints and the middle “kink” point.  (Note that the graph below has been rescaled from the one on the previous page.)

***Now let’s talk about prices***

How many chairs and tables would Dan produce if the price of chairs (P_c) was $1,000 and the price of tables (P_t) was $1?

Chairs: Tables:

How many chairs and tables would Leslie produce if the price of chairs was $1,000 and the price of tables was $1?

Chairs: Tables:

Consequently, how many chairs and tables would society produce if the price of chairs was $1,000 and the price of tables was $1?

Chairs: 30 Tables: 0

How many chairs and tables would Dan produce if the price of tables was $750 and the price of chairs was $2?

Chairs: Tables:

How many chairs and tables would Leslie produce if the price of tables was $750 and the price of chairs was $2?

Chairs: 0 Tables:

Consequently, how many chairs and tables would society produce if the price of tables was $750 and the price of chairs was $2?

Chairs: Tables:

If P_c/P_t = 15 (so chairs sell at 15 times the price of tables), how many chairs and tables will Dan produce?

Chairs: Tables:

If P_c/P_t = 15 (so chairs sell at 15 times the price of tables), how many chairs and tables will Leslie produce?

Chairs: Tables:

Consequently, if P_c/P_t = 15 (so chairs sell at 15 times the price of tables), how many chairs and tables will society produce?

Chairs : 30 Tables:

At what price ratio (P_c/P_t) will Dan be indifferent between producing chairs and tables?

P_c/P_t = 1/3

If P_c/P_t = 1/3 (so chairs sell at 1/3 the price of tables), how many chairs and tables will Dan produce?

Chairs: 0 ≤ y ≤ 24 Tables:

If P_c/P_t = 1/3 (so chairs sell at 1/3 the price of tables), how many chairs and tables will Leslie produce?

Chairs: Tables:

Consequently, if P_c/P_t = 1/3 (so chairs sell at 1/3 the price of tables), how many chairs and tables will society produce?

Chairs : 0 ≤ y ≤ 24 Tables:

At what price ratio (P_c/P_t) will Leslie be indifferent between producing chairs and tables?

If P_c/P_t = 10 (so chairs sell at 10 times the price of tables), how many chairs and tables will Dan produce?

Chairs: Tables:

If P_c/P_t = 10 (so chairs sell at 10 times the price of tables), how many chairs and tables will Leslie produce?

Chairs: Tables: 0 ≤ x ≤ 60

Consequently, if P_c/P_t = 10 (so chairs sell at 10 times the price of tables), how many chairs and tables will society produce?

Chairs : Tables: 0 ≤ x ≤ 60

If P_c/P_t = 5 (so chairs sell at 5 times the price of tables), how many chairs and tables will Dan produce?

***NOTE THAT 1/3 < 5 < 10***

Chairs: Tables:

If P_c/P_t = 5 (so chairs sell at 5 times the price of tables), how many chairs and tables will Leslie produce?

Chairs: Tables:

Consequently, if P_c/P_t = 5 (so chairs sell at 5 times the price of tables), how many chairs and tables will society produce?

Chairs : 24 Tables:

If P_c/P_t < 1/3, how many chairs and tables will Dan produce?

Chairs: Tables:

If P_c/P_t < 1/3, how many chairs and tables will Leslie produce?

Chairs: Tables:

Consequently, if P_c/P_t < 1/3, how many chairs and tables will society produce?

Chairs: Tables: 68

If P_c/P_t > 10, how many chairs and tables will Dan produce?

Chairs: Tables:

If P_c/P_t > 10, how many chairs and tables will Leslie produce?

Chairs: Tables:

Consequently, if P_c/P_t > 10, how many chairs and tables will society produce?

Chairs: Tables: 0

Fill in this table.  The productions are listed as (chairs, tables).