Posted: February 5th, 2015

Frank the farmer can make one ounce of meat in 60 minutes and one ounce of potatoes in 15 minutes. Ricky the rancher can make one ounce of meat in 20 minutes and one ounce of potatoes in 10 minutes.

EC101C

ASSIGNMENT 1

SECTION ONE:        3.5 points
I will give you some production possibility frontier data. Please follow the instructions. Also, put the answers between the questions.
DATA:  Frank the farmer can make one ounce of meat in 60 minutes and one ounce of potatoes in 15 minutes.
Ricky the rancher can make one ounce of meat in 20 minutes and one ounce of potatoes in 10 minutes.
Assume an eight hour work day.
a)    Draw a production possibility frontier for Frank. Explain (typed) what you are showing. Use the proper numbers. (Straight line curve).

b)    Now do the same thing for Ricky.
c)    Who has an absolute advantage in meat? Explain.
d)    Who has an absolute advantage in potatoes? Explain.
e)    Now make a small table showing for Frank and Ricky the opportunity cost of meat and potatoes. For example
1 oz. of meat            1 oz. of potatoes
Frank
Ricky

f) Who has a comparative advantage in meat? Explain.

Who has a comparative advantage in potatoes? Explain.
f)    Make a small table showing how much of each product Ricky and Frank can produce in the eight hour day.
g)    If Frank divides his time equally between potatoes and meat, how much of each can he produce?
h)    If Ricky divides his time equally between potatoes and meat, how much of each can he produce?
i)    Now make two PPF’s, one for Frank and one for Ricky and label as point A on each curve where they will produce. Be sure to show the proper numbers on each

axis.
j)    Now, assume Ricky says the following to Frank: “Suppose I spend 6 hours a day raising cattle and two hours growing potatoes. Then I can produce 18 oz. of meat

and 12 ounces of potatoes. After I give you 5 ounces of meat in exchange for 15 ounces of your potatoes, I will end up with 13 ounces of meat and  27 ounces of

potatoes. Assume Frank only produces the product for which he has a comparative advantage. How many ounces of meat and potatoes will Frank now have?
k)    Now, look at ‘g’ again and list what Frank had when he spent his time equally between potatoes and meat. What does Frank have now after the deal made in ‘j’?
l)    What is the increase in meat and potatoes for Frank? (Note this is the gain from trade).
m)    Now look at ‘h’ again and list what Ricky had when he spent his time equally between potatoes and meat. What does Ricky have now after the deal made in ‘j’?
n)      What is the increase in meat and potatoes forRicky? (Note this is the gain from trade).

SECTION TWO:        0.5 points
A local pizzeria owner contacts you for advice. She wants to run a late-night special to increase the DEMAND for pizza . Her two options are as follows:
•    Reduce the price of large pizzas.
•    Reduce the price of a complementary good – for example- offer two half priced bottles or cans of soda with every large pizza ordered.

Explain which option you tell her to employ and explain why you chose this option as the way for her to increase demand for pizza.

SECTION THREE:        1 point
Which of the following will decrease the supply of chocolate ice cream?
•    A medical report finding that consuming chocolate ice cream prevents cancer.
•    A decrease in the price of chocolate ice cream.
•    An increase in the price of chocolate, an ingredient used to make ice cream.
•    An increase in the price of whipped cream, a complementary good.
As well as identifying the correct answer, please explain why each is or is not the correct answer. Place your answers between each choice.

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