Question

Suppose that Perry and Taimur both produce poems and novels. Perry’s productive capabilities are as follows. He can produce 12 poems if he spends all of his time writing poems or he can write 2 novels if he spends all of his time writing novels. He can also produce any linear combination in between. Taimur’s productive capabilities are as follows. He can produce 12 poems if he spends all of his time writing poems or he can write 4 novels if he spends all of his time writing novels. He can also produce any linear combination in between.

A. Which person can produce poems at lower opportunity cost? Explain. Which person can produce novels at a lower opportunity cost? Explain.
B. Suppose that Perry and Taimur make the following deal. Perry will spend all of his time making poems and Taimur will spend all of his time making novels. Taimur will then send 1 novel to Perry and in return Perry will send Taimur 4 poems. How many poems and novels will Perry have after this trade? How may poems and novels will Taimur have after this trade?
C. I claim that after trading with Taimur, Perry can now consume a combination of poems and novels that he never could have produced for himself. Likewise, Taimur can now consume a combination of poems and novels that he never could have produced for himself after trading with Perry. Use equations and a couple of simple calculations to demonstrate that I am correct.
D. What do you think is going on here? Why can both Perry and Taimur now consume a quantity of goods that they never could have produced for themselves?

Answer 1

Answer is explained in the explanation section below.

Step-by-step explanation:

Solution:

a.

Perry poems = 12

Taimur Poems = 12

Perry Novels = 2

Taimur Novels = 4

Opportunity cost of Poems for Perry = 2/12 = 1/6

Opportunity cost of Poems for Taimur = 4/12 = 1/3

Opportunity cost of Novels for Perry = 12/2 = 6

Opportunity cost of Novels for Taimur = 12/4 = 3

As opportunity cost of poems for Perry < Opportunity Cost of Poems for Taimur

So,

Perry can produce poems at lower opportunity cost.

And,

Opportunity cost of Novels for Taimur < Opportunity cost of Novels for Perry

SO,

Taimur can produce novels at lower opportunity cost.

b.

Perry spend all time in making poems = 12 poems

Taimur Spend all time in novel making = 4 novels

Trade ---> Taimur send 1 novel, So, he will left with 3 novels, in exchange he will get 4 poems.

So, after trade, we have:

Perry = 8 novels and 1 Poem

Taimur = 4 poems and 3 novels.

c.

The claim is correct.

This is because, Perry makes 8 poems, he is left with with only 4 novels of productivity and as his opportunity cost of novel is 6, he won't be able to produce even 1 novel, if he doesn't trade.

Let's assume Perry and Taimur both have 12 hours of time each.

Productivity of Perry ---> Poems: 12 hours/12 units = 1 Novels: 12/2 = 6

i.e. Perry need 1 hour to produce 1 poem

and 6 hours to produce 1 novel .

So, when Perry produce 8 poems, he exhaust his 8 hours. Now, he is left with 4 hours. So he cannot produce 1 novel, which require 6 hours to complete. So, after trade, he is better off.

d.

As both Perry and Taimur, produce the good, in which they have comparative advantage it lead to specialization. And when they trade the good, in which they have specialization which will lead them expand this consumption possibilities.