Question

Cornelius and Daisy are two independently operating bootleggers. Cornelius can produce 50 cases of moonshine or 200 bushels of cotton per year. Daisy can produce 20 cases of moonshine or 400 bushels of cotton per year. Assume that each have a straight line production possibility frontier or curve. In order to avoid suspicion from the law, each of them must spend at least half of their time gathering cotton, but because moonshine is much more profitable they pick the minimum possible quantity of cotton in order to avoid the law. Assume they both operate on their own PPF (i.e., they are each productively efficient). One day they meet and decide to work together.

1) What is Cornelius’ output operating independently ? Cotton: ________: Moonshine: ________

2) What is Daisy’s output operating independently? Cotton: ________ ; Moonshine: ________

3) Once they join forces, they must produce the same combined amount of cotton as before in order to avoid suspicion from the law, but by joining forces they can now produce more moonshine. Determine their combined production and who produces what. After combining forces, Cornelius produces ________ cotton and ________ moonshine; Daisy produces ________ cotton and ________ moonshine.

Hints: if you use graphs, note that the combined production possibility curve is not a straight line; use opportunity costs to determine who produces what when they combine forces.
(Enter whole numbers, no command and no decimal places.)

Answer 1

1) Cornelius can produce 50 cases of moonshine or 200 bushels of cotton per year. If Cornelius spends half of their time in producing each good, then, Cornelius' output operating independently is 100 bushels of cotton and 25 cases of moonshine.

2) Daisy can produce 20 cases of moonshine or 400 bushels of cotton per year. If Daisy spends half of their time in producing each good, then, Daisy' output operating independently is 200 bushels of cotton and 10 cases of moonshine.

3) In the diagram below we have shown the combined PPF for Cornelius and Daisy:

After combining forces, both produce at point E. Cornelius produces 0 bushels of cotton and 50 cases of moonshine whereas, Daisy produces 400 bushels of cotton and 0 cases of moonshine. This is because Cornelius has comparative advantage in producing moonshine whereas, Daisy has comparative advantage in producing cotton.