Reference no: EM133516372

Assignment:

The Homer & Ned Story

Economists often use the mental or rhetorical device of analyzing a "Robinson Crusoe" economy. Wikipedia explains:

A Robinson Crusoe economy is a simple framework to study trade in economics.[1] It assumes an economy with one consumer, one producer, and two goods. The title "Robinson Crusoe" is a reference to the novel of the same name authored by Daniel Defoe in 1719. The story is that of a castaway who spent 28 years on an uninhabited island near Trinidad,[2] thus appropriate to describe an uncomplicated economic structure with only one actor.

As a concept in economics, it assumes importance due to its ability to simplify the complexities of the real world. The implicit assumption is that the study of a one-agent economy will provide useful insights into the functioning of a real-world economy with many economic agents....

In the Robinson Crusoe economy, there is only one individual - Robinson Crusoe himself. He acts both as a producer to maximize profits, as well as a consumer to maximize his utility.[5] The possibility of trade can be introduced by adding another person to the economy....

The basic assumptions of the Robinson Crusoe economy are as follows:[6]

• The island is cut off from the rest of the world (and hence cannot trade)
• There is only a single economic agent (Crusoe himself)
• All commodities on the island have to be produced or found from existing stocks

We are going to use this concept to analyze a simple production possibilities curve to learn why two people might trade. Here's the situation:

Assume that there is a person on a relatively deserted island. Let's call this person Homer. Homer has almost everything available to him that he might want. However, there are two goods that Homer must produce himself using his scarce (limited) resources: bread and beer. Both goods are produced by combining many of the same resources such as grain, heat, water, yeast, and labor. If these resources are limited, then obviously how much bread Homer chooses to produce will reduce the resources available to produce beer. But Homer wants both bread and beer. Here's a table of Homer's production possibilities:

1. What is Homer's opportunity cost of producing 1 unit of beer? (give a numeric answer using one decimal place and assume it is in "units of bread")
2. What is Ned's opportunity cost of producing 1 unit of beer? (give a numeric answer using one decimal place and assume it is in "units of bread")
3. Who has an absolute advantage in the production of bread? Homer, Ned, or neither? (enter only one word)
4. Homer wants to produce 6 units of bread and 8 units of beer. Is this production plan efficient, inefficient, or impossible? (enter just a one- word answer)
5. Suppose Ned plans to produce 14 units of bread and 14 units of beer. Is this point on, above, or below the PPF curve? (just enter one word)
6. Who has the comparative advantage in producing bread? Homer, Ned, or neither? (just enter one word)
7. Homer decides to produce 7 units of bread, consume 6 of them, and offer to trade the 7th bread to Ned for some beer. What is the minimum amount of beer Homer needs to get from Ned to be at least as well off as Homer was before the trade? (numeric answer with one decimal place)
8. Ned is considering Homer's trade offer. Homer has proposed making 7 units of bread, keeping 6, and giving 1 unit to Ned in return for some beer. What is the maximum amount of beer Ned would be willing to "pay" for this unit of bread? (numeric answer with 1 decimal place).