Mary produces both hats and apple pies:
• If Mary utilizes all her resources to produce hats, she could produce 48 hats an hour.
• If she utilizes all her resources to produce apple pies, she could make 24 apple pies an hour.
Bill produces both hats and apple pies.
• If Bill utilizes all his resources to produce hats, he could produce 24 hats an hour.
• If he utilizes all his resources to produce apple pies, he could make 48 apple pies an hour.
To complete this assignment, you must answer all of the following questions and complete all of the following activities:
1. Construct Mary’s production possibilities frontier and Bill’s production possibilities frontier. Plot hats on vertical axis.
2. What is Mary’s opportunity cost of producing one apple pie?
3. What is Mary’s opportunity cost of producing one hat?
4. What is Bill’s opportunity cost of producing one apple pie?
5. What is Bill’s opportunity cost of producing one hat?
6. In which of the two activities does Mary have a comparative advantage? In which of the two activities does Bill have a comparative advantage? Describe your reasoning.
7. Assume Mary and Bill are each producing 16 apple pies and 16 hats. Indicate this point on the production possibilities diagram.
8. Let Mary and Bill specialize in what they each have a comparative advantage in. Point out these two points on your production possibilities diagram. What has happened to the total amount of hats and apple pies being produced? Describe why this happened.
9. Suppose that both parties specialize in producing the good in which they have a comparative advantage. If Mary and Bill are willing to trade at a rate of one hat for one apple pie, and make a trade of 24 hats for 24 apple pies, show on your production possibilities diagram that both Mary and Bill could get outside of their individual production possibilities frontier. Why does this mean that both Mary and Bill are better off?
10. Use Mary’s opportunity costs and Bill’s opportunity costs to describe why the terms of trade of one hat for one apple pie was a good terms of trade for both of them.
11. Suppose that both parties specialize in producing the good in which they have a comparative advantage. Will two hats for one apple pie be a good terms of trade for both Mary and Bill? Describe why or why not.
12. Suppose that both parties specialize in producing the good in which they have a comparative advantage. Use Mary’s opportunity costs and Bill’s opportunity costs to determine a range for the terms of trade that will be good for both Mary and Bill.
13. If Mary and Bill were Nation A and Nation B instead, the same principles of comparative advantage, specialization, and the benefits of trade would apply. If nations specialize in an area of comparative advantage and then trade with other nations who have specialized in areas of their comparative advantage, what would occur to the wealth of the trading nations? What can happen to the standard of living of the citizens of the nations? Why?