32. Production - Solutions

32. Production - Solutions - Chapter 32 NAME Production...

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Chapter 32 NAME Production Introduction. In this section we explore economywide production pos- sibility sets. We pay special attention to the principle of comparative advantage. The principle is simply that efficiency suggests that people should specialize according to their relative abilities in diFerent activities rather than absolute abilities. Example: ±or simplicity, let us imagine an island with only two people on it, both of them farmers. They do not trade with the outside world. ±armer A has 100 acres and is able to grow two crops, wheat and hay. Each acre of his land that he plants to wheat will give him 50 bushels of wheat. Each acre of his land that he plants to hay will give him 2 tons of hay. ±armer B also has 100 acres, but his land is not so good. Each acre of his land yields only 20 bushels of wheat and only 1 ton of hay. Notice that, although ±armer A’s land is better for both wheat and hay, ±armer B’s land has comparative advantage in the production of hay. This is true because the ratio of tons of hay to bushels of wheat per acre 2 / 50 = . 04 for ±armer A and 1 / 20 = . 05 for ±armer B. ±armer A, on the other hand, has comparative advantage in the production of wheat, since the ratio of bushels of wheat to tons of hay is 50 / 2 = 25 for ±armer A and 20 / 1 = 20 for ±armer B. The efficient way to arrange production is to have ±armer A “specialize” in wheat and farmer B “specialize” in hay. If ±armer A devotes all of his land to wheat and ±armer B devotes all of his land to hay, then total wheat production will be 5,000 bushels and total hay production will be 100 tons. Suppose that they decide to produce only 4,000 bushels of wheat. Given that they are going to produce 4,000 bushels of wheat, the most hay they can possibly produce together will be obtained if ±armer A devotes 80 acres to wheat and 20 acres to hay while ±armer B devotes all of his land to hay. Suppose that they decide to produce 6,000 bushels of wheat. Then they will get the most hay possible given that they are producing 6,000 bushels of wheat if ±armer A puts all of his land into wheat and ±armer B puts 50 acres into wheat and the remaining 50 acres into hay. 32.1 (0) Tip and Spot ²nally got into college. Tip can write term papers at the rate of 10 pages per hour and solve workbook problems at the rate of 3 per hour. Spot can write term papers at the rate of 6 pages per hour and solve workbook problems at the rate of 2 per hour. Which of these two has comparative advantage in solving workbook problems? Spot.
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400 PRODUCTION (Ch. 32) 0 2 04 06 08 01 0 0 20 40 60 80 Problems Pages 120 Spot Tip Joint 30 18 12 36 96 (a) Tip and Spot each work 6 hours a day. They decide to work together and to produce a combination of term papers and workbook problems that lies on their joint production possibility frontier. On the above graph plot their joint production possibility frontier. If they produce less than 60 pages of term papers, then Tip will write all of the term papers.
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32. Production - Solutions - Chapter 32 NAME Production...

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