Consider two individuals, Barney and Fred. The Fred can produce either 15 gallons of beer or 3 gallons of wine in one hour. In one hour, Barney can form the 2 gallons of beer or 4 gallons of wine. Suppose both goods can be formed in the continuous quantities.
1. Discuss who has the comparative advantage in forming each good. The specific calculations of opportunity cost should be part of your explanation. Illustrate the PPF for the entire economy for one hour if Barney and Fred work together with wine on the horizontal axis. Be sure to put specific numbers on each intercept. Provide the specific values for the MRT at each point and identify any point where the MRT changes.
2. Suppose that each person wants to consume 3 gallons of wine, then as much beer as they can. Calculate what each person will end up consuming, when they cannot trade or when they can trade at a price of 1gallon wine = 2 gallons beer.