Question

handout 4: durite worksheet (page 2 of 2)
part 2: production possibilities

1. plot and label each of the combinations of brownies and pizzas listed below on your production possibilities graph above. write \yes\ next to those that it is possible for you to produce in six hours and

o\ next to those that it would not be possible for you to produce in six hours.
a) yes 4 brownies and 1 pizza
d) yes 1 brownie and 2 pizzas
b) no 0 brownies and 5 pizzas
e) yes 4 brownies and 3 pizzas
c) no 2 brownies and 4 pizzas
f) yes 2 brownies and 2 pizzas
notice that without trade, the number of brownies and pizzas you produce is also the number of brownies and pizzas you can consume.
part 3: opportunity cost
the opportunity cost of doing something is the highest - valued alternative you must give up to do it. after flipping over one of your production cards, answer the following questions:

1. what is the opportunity cost of producing half a pizza? _
2. what is the opportunity cost of producing one pizza? _
3. what is the opportunity cost of producing one brownie? _

part 4: gains from trade

1. if you specialize in producing brownies, how many brownies could you produce? _
2. suppose you can trade your brownies for pizzas at a rate of one pizza for each brownie. complete the table below.
3. compare this table with that in part 1. how has the number of pizzas you can consume each amount of brownies changed? _
4. use this information to plot a new line on your production possibilities graph. label this \cpf\ for consumption possibilities frontier.
5. shade the area between the ppf and cpf to show the gains from trade.
6. given the cpf, identify the combinations of brownies and pizzas it is now possible for consume that were not possible before trading. _

Explanation:

To solve the opportunity cost and gains from trade questions, we analyze the production possibilities and trade - offs:

Part 3: Opportunity Cost

1. Opportunity Cost of Producing Half a Pizza

We assume a production relationship where the time to produce a pizza and brownies is related. If we consider the trade - off between brownies and pizzas, and we know that the opportunity cost of 1 pizza is 2 brownies (we will derive this in the next step), then for half a pizza, we divide the opportunity cost of 1 pizza by 2. So, the opportunity cost of half a pizza is $\frac{2}{2}=1$ brownie.

2. Opportunity Cost of Producing One Pizza

From the production possibilities (for example, when we move from producing more brownies to more pizzas), we can see that to produce 1 more pizza, we have to give up 2 brownies. This is because if we look at the production combinations, the trade - off between pizzas and brownies shows that the rate of exchange between them (in terms of what we give up) is 2 brownies per pizza.

3. Opportunity Cost of Producing One Brownie

Since the opportunity cost of 1 pizza is 2 brownies, we can find the opportunity cost of 1 brownie by taking the reciprocal. So, the opportunity cost of 1 brownie is $\frac{1}{2}$ pizza (because if 2 brownies = 1 pizza, then 1 brownie=$\frac{1}{2}$ pizza).

Part 4: Gains from Trade

1. Specialization in Brownies

If we specialize in producing brownies, we assume that we use all the available time (6 hours) to produce brownies. From the production possibilities (implied by the trade - offs), if we can produce 2 brownies per "unit" of time (related to the opportunity cost), and with 6 hours, we can produce 6 brownies (since the trade - off of 1 pizza = 2 brownies implies that the maximum brownies production is 6 when we don't produce any pizzas).

3. Change in Pizza Consumption

Before trade, the production possibilities frontier (PPF) shows the maximum combinations of brownies and pizzas we can produce. After trade, with the trade rate of 1 brownie for 1 pizza, for each number of brownies we keep, we can get more pizzas than what we could produce on our own (from the PPF). For example, when we keep 5 brownies, we can trade 1 brownie for 1 pizza, so we get 0.5 more pizza than what we could produce without trade. In general, for each amount of brownies kept, the number of pizzas we can consume after trade is higher than before trade (because trade allows us to access a consumption possibilities frontier (CPF) that is outside the PPF for most combinations, except when we produce only one good).

Answer:

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Part 3

1. The opportunity cost of producing half a pizza is 1 brownie.
2. The opportunity cost of producing one pizza is 2 brownies.
3. The opportunity cost of producing one brownie is $\frac{1}{2}$ pizza.

Part 4

1. If we specialize in brownies, we can produce 6 brownies.
2. For each amount of brownies kept, the number of pizzas we can consume after trade is greater than the number we could consume (produce) without trade (except at the extreme points of producing only brownies or only pizzas).