ennec 100 homework 1 - Step three is determining which good...

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5. The first step in this process is to determine Joe Paterno’s and Ronald McDonald’s opportunity cost for turtles and bananas. First I will look at Joe Paterno. Paterno’s production function is 2T+3B=400. This means that for every turtle produced the opportunity cost is 2/3 of a banana, or T=2/3B. For every banana produced the opportunity cost is 3/2T, or B=3/2T. Ronald McDonald’s production function is .5T+B=300. For turtles, McDonald’s opportunity cost is T=1/2B. For bananas, McDonald’s opportunity cost is B=2T. The second step is to determine which party has a comparative advantage in each item being produced. For turtles Paterno has an opportunity cost of 2/3B, while McDonald has an opportunity cost of 1/2B. Because McDonald has a lower opportunity cost, he has a comparative advantage in turtles. Conversely, with an opportunity cost of 3/2T versus 2T for McDonald, Paterno has a comparative advantage in bananas.
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Unformatted text preview: Step three is determining which good both should specialize in. The most efficient way is to specialize in goods a person has a comparative advantage in, and then trade. Paterno should specialize in bananas and McDonald should specialize in turtles. Because of specializing they can Paterno can produce 133.3 bananas and McDonald can produce 600 turtles. 6. At you reach the equilibrium price by finding out P by setting supply and demand equal to one another. When you do this you find the equilibrium price at 30. This price will create the most wealth and is where the economy is maximized. The amount of wealth created is 50. You find this by plugging 30 into QS or QD in the supply and demand equations. By plugging 25 into the QS and QD you create 75 wealth for buyers (demand), but only 45 wealth for sellers (supply). By plugging in 50, you create -50 wealth for buyers (demand), and 70 wealth for sellers(supply)....
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This note was uploaded on 03/30/2008 for the course ENNEC 100 taught by Professor Blumsack,sethada during the Fall '08 term at Pennsylvania State University, University Park.

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