# production possibility

Homework assignment #1

1. Suppose Joe and Jill have the following production possibility curves. In autarky, Joe produces and consumes 6 of X and 6 of Y, while Jill produces and consumes 1 X and 3 Y.
 Joe Jill X Y X Y 0 12 2 0 1 11 1 2/3 1 2 10 1 1/3 2 3 9 1 3 4 8 2/3 4 5 7 1/3 5 6 6 0 6 7 5 8 4 9 3 10 2 11 1 12 0

Show how by specializing and exchanging, each can consume more Y and the same amount of X as each consumed before specialization and trade.

• Mike is indifferent between bundles A, B, and C and Jane is indifferent between bundles D, E, and F.
 Mike Ja ne Beer Tacos Beer Tacos A          15 22 D           22 10 B          16 15 E           23 8 C          17 9 F           24 7

Mike currently has bundle B, while Jane has bundle E. Assume zero transaction cost, show a mutually beneficial trade if one is possible. What are the gains from trade if exchange takes place? Under what conditions will all trade stop? If in the above problem transaction costs were 5 tacos, would trade take place? How might a middleman change this outcome?