Question

Steve can bake either 4 loaves of bread or 8 dozen cookies a day. Sarah can bake either 4 loaves of bread or 4 dozen cookies a day.
a. Show the production possibilities frontiers for Steve and Sarah
b. Suppose trade is not allowed between Steve and Sarah and as a result, both Steve and Sarah spending half a day (12 hours) baking bread and the other half a day baking cookie. Show both the production and consumption bundles for Steve and Sarah on their respective PPFs, when trade is not allowed between Steve and Sarah.
c. Show, using production possibility frontiers in (a), that Steve and Sarah would be better off specializing in their baking activities and then trading, rather than baking only for themselves. Be specific and state the production and consumption bundles with trade

Answer 1

The production possibility frontier (PPF) of both Steve and Sarah per day is given in graph A.

Production and consumption bundle of Steve and Sarah on their respective PPF when trade is not allowed is given in graph B

Consumption of steve:

2 Loaves of bread and 6 cookies

Consumption of sarah:

2 Loaves of bread and 2 cookies

The opportunity cost of baking bread for steve:

4 Bread = 12 cookies

4 : 12

= 1 : 3

So,

1 Bread = 3 cookies

The opportunity cost of baking bread for Sarah:

4 Bread = 4 cookies

4 : 4

= 1 : 1

So,

1 Bread = 1 cookies

The opportunity cost of cookies for steve:

12 cookies = 4 Bread

3 cookies = 1 bread

1 cookie = 1/3 bread

The opportunity cost of cookies for Sarah:

4 cookies = 4Bread

1 cookies = 1 Bread

• Recall, the lower the opportunity cost, the higher the comparative advantage

Therefore,

Steve has a comparative advantage in producing cookies while Sarah has a comparative advantage in producing bread

Before trade:

Total consumption = 4 Bread 8 cookies

After trade:

Total consumption = 4 Bread 12 cookies

In conclusion, the economy is better off

What is production possibility frontier?

The production possibility frontier also known as the production possibility curve is the graphical representation of possible combination of goods that can be produced by a producer at a particular time with the available resources.

Learn more about production possibility frontier:

https://brainly.com/question/26492942