An economy has 100 identical workers. Each one can produce four cakes or three shirts, regardless of the number of other individuals producing each good.

- How many cakes can be produced in this economy when all the workers are cooking?
- How many shirts can be produced in this economy when all the workers are sewing?
- On a diagram with cakes on the vertical axis, and shirts on the horizontal axis, join these points with a straight line to form the
*PPF*.
- Label the inefficient and unattainable regions on the diagram.

In the table below are listed a series of points that define an economy's production possibility frontier for goods *Y* and *X*.

*Y* |
1000 |
900 |
800 |
700 |
600 |
500 |
400 |
300 |
200 |
100 |
0 |

*X* |
0 |
1600 |
2500 |
3300 |
4000 |
4600 |
5100 |
5500 |
5750 |
5900 |
6000 |

- Plot these pairs of points to scale, on graph paper, or with the help of a spreadsheet.
- Given the shape of this
*PPF* is the economy made up of individuals who are similar or different in their production capabilities?
- What is the opportunity cost of producing 100 more
*Y* at the combination (*X*=5500,*Y*=300).
- Suppose next there is technological change so that at every output level of good
*Y* the economy can produce 20 percent more *X*. Enter a new row in the table containing the new values, and plot the new *PPF*.

Using the *PPF* that you have graphed using the data in Exercise 1.2, determine if the following combinations are attainable or not: (*X*=3000,*Y*=720), (*X*=4800,*Y*=480).

You and your partner are highly efficient people. You can earn $20 per hour in the workplace; your partner can earn $30 per hour.

- What is the opportunity cost of one hour of leisure for you?
- What is the opportunity cost of one hour of leisure for your partner?
- Now consider what a
*PPF* would look like: You can produce/consume two things, leisure and income. Since income buys things you can think of the *PPF* as having these two 'products' – leisure and consumption goods/services. So, with leisure on the horizontal axis and income in dollars is on the vertical axis, plot your *PPF*. You can assume that you have 12 hours per day to allocate to either leisure or income. [*Hint*: the leisure axis will have an intercept of 12 hours. The income intercept will have a dollar value corresponding to where all hours are devoted to work.]
- Draw the
*PPF* for your partner.

Louis and Carrie Anne are students who have set up a summer business in their neighbourhood. They cut lawns and clean cars. Louis is particularly efficient at cutting the grass – he requires one hour to cut a typical lawn, while Carrie Anne needs one and one half hours. In contrast, Carrie Anne can wash a car in a half hour, while Louis requires three quarters of an hour.

- If they decide to specialize in the tasks, who should cut the grass and who should wash cars?
- If they each work a twelve hour day, how many lawns can they cut and how many cars can they wash if they each specialize in performing the task where they are most efficient?
- Illustrate the
*PPF* for each individual where lawns are on the horizontal axis and car washes on the vertical axis, if each individual has twelve hours in a day.

Continuing with the same data set, suppose Carrie Anne's productivity improves so that she can now cut grass as efficiently as Louis; that is, she can cut grass in one hour, and can still wash a car in one half of an hour.

- In a new diagram draw the
*PPF* for each individual.
- In this case does specialization matter if they are to be as productive as possible as a team?
- Draw the PPF for the whole economy, labelling the intercepts and the 'kink' point coordinates.

Going back to the simple *PPF* plotted for Exercise 1.1 where each of 100 workers can produce either four cakes or three shirts, suppose a recession reduces demand for the outputs to 220 cakes and 129 shirts.

- Plot this combination of outputs in the diagram that also shows the
*PPF*.
- How many workers are needed to produce this output of cakes and shirts?
- What percentage of the 100 worker labour force is unemployed?