Monday, January 30, 2012

Economics question - production possibilities frontiers?

Here's the question that has me BOGGLED...i've been at this for an hour now!



"Iggi and Kurt each own an ice cream shop that sells homemade ice cream on a homemade waffle cone. The table below shows the number of ice cream scoops and waffle cones that Iggi and Kurt produce in an hour. Both Iggi and Kurt work 8 hours per day and spend their time producing ice cream, waffle cones, or a combination of the two.





Ice Cream(Scoops per hour)

Waffle Cones(Cones per hour)



Iggi---- 24scoops...........8cones

Kurt---- 16scoops..........4cones







1.7. The following graph shows Kurt's and Iggi's production possibilities frontiers for a given day, and indicates Kurt's consumption without trade (point K) and Iggi's consumption without trade (point I).



With trade, Kurt and Iggi each dedicate all 8 hours to the production of the good in which they have a comparative advantage. (My note: Iggi has a CA in ice cream, Kurt in waffle cones.) The terms of trade stipulate a daily shipment of 70 scoops of ice cream for 20 waffle cones.



Place a tan point (dash symbol) on the graph to indicate Iggi's consumption with trade (I*). Then place a black point (X symbol) on the graph to indicate Kurt's consumption with trade (K*). Accuracy matters, so you should check your coordinates before you submit your answer."



according to my calculations, after trade Kurt has 12 waffle cones (a DECREASE from his 20 cones w/o trade) and 70 ice cream. Iggi has 20 waffle cones (a DECREASE from his 44 w/o trade) and 122 ice cream. this is wrong, isn't it? shouldn't both goods increase after trade?! please answer, i have to hand this in online and the deadline is in 2 hours. thanks!Economics question - production possibilities frontiers?
Iggi has an absolute advantage in the production of ice cream (1 ice-cream = 1/3 waffle cones)

Kurt has an comparative advantage in the production of ice cream (1 ice-cream = 1/4 waffle cones, thus less and consequently cheaper).

No comments:

Post a Comment