Question

For all questions on this assignment, consider two people who we can initially treat as two economies in autarky. The first economy consists only of John, and the second economy consists only of Larry. Both start off in autarky, as we said, and each produces peanut butter and orange juice using only forty hours of labor each per week.

Each week, John can produce 30 quarts of orange juice if he produces no peanut butter; he can produce 25 jars of peanut butter if he produces no orange juice. Larry can produce 15 quarts of orange juice if he produces no peanut butter; he can produce 20 jars of peanut butter if he produces no orange juice. You may assume throughout the assignment that the labor hours used by John and Larry are not specialized, so that their PPFs are straight lines as opposed to bow-shaped curves.

In autarky, John spends 60% of his time producing orange juice and the rest of his time producing peanut butter. Larry spends 80% of his time producing orange juice and the rest of his time producing peanut butter.

A. In autarky, how many jars of peanut butter does John consume?

B. In autarky, how many jars of peanut butter does Larry consume?

C. In autarky, how many quarts of orange juice does Larry consume?

D. In autarky, how many quarts of orange juice does John consume?

E. Assume that John and Larry decide to trade with each other. They decide that each of them will fully specialize in the good where he has the comparative advantage, and then they’ll work out some specific terms of trade. Under this agreement, how many quarts of orange juice will be available for consumption for John and Larry combined?

F. Under the trade agreement discussed in the last question, how many jars of peanut butter will be available for John and Larry to consume combined?

G. What is the change in jars of peanut butter that both John and Larry together can consume by trading, compared to how many they consumed together in autarky?

Answer 1

A. In 40 hours, John can produce 25 jars of peanut.

Thus, In 1 hour, he can produce 25/40 jars of peanut.

In autarky, he can only consume what he can produce by himself. And as per question John spends 40 percent of his time in producing peanut (that is, 40/100*40 =16 hours of his time)

Thus, he can produce and thus consume, 25/40 *16 = 10 jars of peanut butter.

B. In 40 hours, Larry can produce 20 jars of peanut butter.

In one hour, he can produce 20/40 jars of peanut butter.

He spends 20 percent of his time in producing peanut butter in autarky. That is he spends 20/100*40 = 8 hours in producing peanut butter.

Thus, Larry can produce and hence consume 20/40 *8 = 4 jars of peanut butter in autarky

C. In 40 hours John can produce 30 quarts of orange juice.

In 1 hour, he can produce 30/40 =3/4 quarts of orange juice.

In autarky, he spends 60 percent of his total 40 hours in producing orange juice. He spends a total 24 hours in producing it.

Thus, he can produce in 24 hours and thus, consume 3/4*24= 18 quarts of orange juice.

D. Similarly for Larry,

In 40 hours he can produce 15 quarts of orange juice

In 1 hour, Larry can produce 15/40 = 3/8 quarts of orange juice.

Larry spends 80 percent of his time in producing orange juice. That is a total of 32 hours.

Thus, Larry can produce and consume 3/8 *32 = 12 quarts of orange juice.