Consider a simple two person economy in which the two

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Consider a simple, two person economy, in which the two citizens, Curly and Moe, can produce two different goods, butter and rice, in an 8 hour workday. In one hour, Curly can either produce 1 lb. of butter or produce 2 lbs. of rice. In one hour, Moe can either produce 2 lbs. of butter or produce 1 lb. of rice.

1) Draw the production possibilities frontier (PPF) for one day.

a) Hint: determine the maximum number of lbs. of butter the economy can produce

b) Hint: determine the maximum number of lbs. of rice the economy can produce

c) Hint: if the economy is producing the maximum number of lbs. of butter possible (which means it isn't producing any rice!), but it is decided that society would like some rice, whom would you ask first to start producing rice, Curly or Moe?

d) Hint: the PPF is not a straight line. For any production point chosen (on or within the PPF!), it must be decided how that production point is allocated. A fully defined allocation consists of four values (RC, RM, BC, BM) where RC is the amount of rice Curly gets, BM is the amount of butter Moe gets, etc. Of course the allocation determines the utility received by Curly and Moe. Suppose the utility (U) of Curly is: UC = RC + BC and that of Moe is: UM = RM + BM. 2) Draw the utility possibilities frontier (UPF) for this economy.

3) Find a production point that lies on the PPF that can be allocated in such a way that UC = UM = 12. Be sure to tell me what the production point is (i.e. how many total lbs. of butter and total lbs. of rice are produced) and also how it is allocated (i.e. how many lbs. of each good each member of the economy gets). Hint: there is more than one production point and allocation that answers this question. Hint: I wouldn't trick you, so the point (12, 12) must lie either on or within your UPF.

Reference no: EM13376037

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