Problem No.

Kristen and Anna live in the beach town of Santa Monica. They own a small business in which
they make wristbands and pot holders and sell them to people on the beach. Kristen can make 15
wristbands per hour but only 3 pot holders. Anna is a bit slower and can make only 12
wristbands or 2 pot holders in an hour.

1. For Kristen and Anna, what is the opportunity cost of pot holder? Who has
comparative advantage in the production of pot holders? Explain your answer.

In this scenario, Kristen has the comparative advantage in the production of pot holders.
Kristen’s opportunity cost on pot holder is 5wristbands. In order for her to gain 3 pot holders,
she must give up 15 wristbands.
2. Who has the comparative advantage in the production of wristbands? Explain your
answer.

Anna has the comparative advantage in the production of wristbands. Anna’s opportunity
cost on wristbands is lower than Kristen’s. In order for Anna to gain 12 wristbands, she must
give up 2 pot holders.

3. Assume that Kristen works 20 hours per week in the business on her own, graph the
possible combinations of pot holders and wristbands that she could produce in a
week. Do the same for Anna.
4. If Kristen devoted half of her time (10 out of 20 hours) to wristbands and half of her
time to pot holders, how many of each would she produce in a week? If Anna did
the same, how many of each would she produce? How many wristbands and pot
holders would be produced in total?

If Kristen devoted half of her time to wristband and half of her time to pot holders, she
would be able to produce 150 wristbands and 30 pot holders.

If Anna devoted half of her time to wristband and half of her time to pot holders, she
would be able to produce 120 wristbands and 20 pot holders.

The total wristband produced is 270 pieces and total pot holder produced is 50 pieces.

5. Suppose that Kristen and Anna can sell all their wristbands for $1.00 each and all
their pot holders for $5.5 each. If each of them worked 20 hours per week, how
should they split their time between wristbands and pot holders? What is their
maximum joint revenue?

Kristen and Anna should specialize in specific production in order to increase their joint
revenue. For example, Kristen should specialize in the production of pot holders in order to
earn 330 dollars. While Anna must specialize in the production of wristband to earn 240
dollars. Therefore, when added together, their joint revenue is 570 dollars, maximized.
 Problem No. 2
1. Using the data in the table, graph the ppf (with ovens on the vertical axis).

2. Does the principle of “increasing opportunity cost” hold in this nation? Explain
briefly,
Yes, because as the nation produces more breads it certainly must give up a larger
quantity of ovens to be able to produce it. For example, to increase the production from
15million loves of bread to 30 million, it must sacrifice 6 ovens in order to produce it (36
ovens down to 30 oven). As well as, to increase the production of 15 million loaves of bread
to 60 million loaves of bread, it will sacrifice more oven, increasing to 24 ovens to give up.
(36 ovens down to 12 ovens).

3. If this country chooses to produce both ovens and bread, what will happen to the
ppf over time? Why?
The nation cannot produce the oven and bread at the same time because the nation does
not have enough of the factors of production to support that level of output. Given the
resources it has, the nation can produce at any point on or inside the ppf, but it cannot
produce outside the frontier.
Now suppose that a new technology is discovered that allows twice as many loaves of
bread to be baked in each existing oven.
4. Illustrate (on your original graph) the effect on this new technology on the ppf.

5. Suppose that before the new technology is introduced, the nation produces 22 ovens.
After the new technology is introduced, the nation produces 30 ovens. What is the
effect of the new technology on the production of bread? (give the number of loaves
before and after the change).
Before the new technology is introduced, the nation produces 22 ovens, and the
production of bread is 45 loaves. When the new technology is introduced, the nation
increases their production to 30 ovens, but the production of bread is still the same, it stays at
45 loaves.
 Problem No. 3

Explain the how each of the following situations would affect a nation’s production possibilities
curve.

1. A technological innovation allows the nation to more efficiently covert solar energy
into electricity.

Technological Innovation has brought different modernization and new ways to utilize
the scarce resources. As the demand of the electricity goes up, it will be difficult to come
up on how one can produce an efficient generating electricity machine. Solar energy is
generating electricity through the help of sun. Sun is a resource that can be used. Thus, it
makes it efficient and a possible solution to scarce resources in terms of electricity. The
production possibilities curve increases.

2. A prolonged recession increases the number of unemployed workers in the nation.

A recession is a macroeconomic term that refers to a significant decline in general

economic activity in a designated region. Also, is a period of economic contraction,
where businesses see less demand and begin to lose money. The relationship between
prolonged recession and unemployment is clearly direct because as the time of recession
increases, the number of unemployment also increases. Since organizations need to
reduce expenses, cost, and debts, removing of some employees is possible. The
production possibilities curve in this case decreases.

3. A category 5 hurricane destroys 40% of the nation’s productive capacity.

It is obvious that the production possibilities curve in this scenario will decrease. This
type of phenomena will put the nation into state of calamity resulting to different
livelihoods, and business destroyed. Due to the destroy, most of the business cannot
operate that might lead to possible bankruptcy of the business. Here, the nation’s
economy is inefficient.

4. The quality education in the nation’s college and universities improves greatly.

By having a great educational background, it enables people to be employed or even start

up their own business. It will open great opportunities that could be the key to great
success. Most of the people wants to work abroad, resulting to this, OFW remittances
shape the macroscopic economy of the nation. The production possibilities curve in this
scenario will increase.
5. The nation passes a law requiring all employers to give their employees 16 weeks of
paid vacation each year. Prior to this law, employers were not legally required to
give employee any paid vacation time.

Employees will rather choose to work than to have an unpaid vacation. By this, the
production possibilities curve will increase because there’s a continuous production of
goods and services provided by the business. Employees spends more time working
resulting a huge contribution for the company’s efficiency.