Question

1. With an hour, Paul receives a wage of $40 or produce home goods worth $20. With an hour, Liz receives a wage of $20 or produce home goods worth $40. They have a total of 10 hours available. a. Graph the production possibility frontier (PPF) of both Paul and Liz, separately. b. Graph the PPF of both if they marry. c. Graph the per-capita PPF of both if they marry. d. Show the gains of specialization in your graph. e. Who, Paul or Jane, will work? f. If they produce together $200 worth of home goods, and they are an efficient couple, how much do they produce in total in the market?

2. The children of Paul and Liz are at college now. She is no more so productive at home. With an hour she produces only home goods worth $5, but her market skills have depreciated as well, hence, if she works she receives only $15.

a. Who will specialize in the market now?

b. Imagine each of them work 5 hours in the market and 5 hours at home. Are they being efficient? Prove it.

I ONLY NEED HELP ON QUESTION 2

Answer 1

2.

a.

Required table of production would be as below:

	Outside production	Home production
P	40	20
L	20	40

Now, the opportunity cost of each production should be calculated; this is the amount of benefit foregone because of choosing the other alternative.

Opportunity cost (OC)

	Outside production	Home production
P	20/40 = 0.5	40/20 = 2
L	40/20 = 2	20/40 = 0.5

The person having lower opportunity cost would be specialized in that production.

Outside production: P specializes, since its OC, 0.5, is lower than 2.

Home production: L specializes, since its OC, 0.5, is lower than 2.

b.

Efficiency could be judged with the amount of total production.

If there are 5 hours each,

P’s production = (5 × $40) + (5 × $20) = 200 + 100 = $300

L’s production = (5 × $20) + (5 × $40) = 100 + 200 = $300

Total production = 300 + 300 = $600

Now, if it is based on specialization.

P’s production = (10 × $40) + (0 × $20) = $400

L’s production = (0 × $20) + (10 × $40) = $400

Total production = 400 + 400 = $800

Since the total production based on specialization ($800) is higher than the non-specialized production ($600), they are not efficient in the allocation of 5 hours each (Proved)