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Unformatted text preview: Homework 2 Solutions ECON 010, Fall 2011 Question 1 Larry and Harry are stranded together on a desert island. The raw materials on the island are suitable only for making beer and pizza, but their quantities are unlimited. What is scarce is labor. Harry and Larry each spend 10 hours a day making beer or pizza. The following table specifies how much beer and pizza Harry and Larry can produce per hour. Beer Pizza Harry 1 bottle per hour 0.2 pizza per hour Larry 0.5 bottle per hour 1.5 pizza per hour a. Draw the daily production possibilities frontier (PPF) for Harry and for Larry (i.e. two separate PPFs). Answer: The daily PPF shows all the combinations of beers and pizzas that can be produced by Harry and Larry in one day, if each of them works 10 hours per day. Harrys PPF is the following: Larrys PPF is the following: 1 b. What is the opportunity cost of a beer (in terms of Pizza) for Harry? For Larry? Answer: In order to produce one beer, Harry foregoes the production of 0.2 pizzas. Therefore the opportunity cost of a beer for Harry is 0.2 (pizzas). Analogously, the opportunity cost of a beer for Larry is 3 pizzas (=1.5/0.5). Two remarks: 1) The opportunity cost of a beer (OCb) is given by the slope of the PPF. The oppor- tunity cost of a pizza (OCp) is 1/OCb 2) Since the PPF is a line, the opportunity cost is constant. c. Now suppose their preferences are as follows: Harry wants 2 beers and as much pizza as he can eat each day; Larry wants 2 pizzas and as much beer as he can drink each day. If each man is self-reliant, how much beer and pizza will Harry and Larry eat and drink? Show the consumption points on their respective PPFs....
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