Paint (y)

Martha 2 hours per room

Stewart 4 hours per room

Wallpaper (x)

Martha 8 hours per room

Stewart 10 hours per room

Assume PPF is a straight line for Martha and Stewart. Assume Martha and Stewart has 40 hours (scarce resource). Suppose they evenly distribute the time under autarky between the products to find out their production distribution between paint and wallpaper.

A) What product does Martha and Stewart have

comparative advantage in?

B) If they both completely specialize in the products

they have comparative advantage in, what is their

production after specialization?

C) If Martha is willing to give 5 paint, for how many wallpapers will Stewart agree to the trade?

A) What product does Martha and Stewart have comparative advantage in?

Martha has an advantage in painting rooms Stewart has an advantage in putting wallpaper

B) If they both completely specialize in the products they have comparative advantage in, what is their production after specialization?

Martha is able to paint 20 rooms Stewart is able to put wallpaper on 4 rooms

C) If Martha is willing to give 5 paint, for how many wallpapers will Stewart agree to the trade?

Stewart could be willing to give 12.5 hours of putting wallpaper

Explanation:

Martha's opportunity cost of spending an hour painting a room = 8/2 = 4 hours of putting wallpaper

Martha's opportunity cost of spending an hour putting wallpaper = 2/8 = 0.25 hours of painting

Stewart's opportunity cost of spending an hour painting a room = 10/4 = 2.5 hours of putting wallpaper

Stewart's opportunity cost of spending an hour putting wallpaper = 4/10 = 0.4 hours of painting

Opportunity costs are the additional costs or benefits lost resulting from choosing one investment or activity over another alternative.