Problem Joan and Peter enjoy baking, and their joy has led them to open new businesses. Customers’ favorites are Joan and Peter’s cheese bread and apple pies. Joan takes two hours to bake a dozen loaves of bread and one hour to make a dozen pies. Peter can bake a dozen loaves of bread in three hours and make a dozen pies in two hours. Joan and Peter are looking for ways to cooperate to grow their businesses, but Joan questions the wisdom of partnering with her friend, who is slower than her.
1. (2 point) Should Joan be worried about partnering with Peter? Explain. 2. (2 points) Suppose Joan and Peter have twelve hours daily to bake bread and pies. Insert two tables, one for each, with four columns and three rows. Use the first row for the headings. The first two columns must show the production possibilities when they fully allocate their resources to each activity. Columns three and four must show the opportunity cost of each activity. Graph their production possibilities.
3. (2 point) Indicate who has an absolute and comparative advantage in each production activity.
4. (1 point) Choose a reference point showing their current production level before cooperation. Show your reference point in the graph.
5. (3 points) Show how they can gain from specialization by answering the following questions.
a. Insert a table to organize your finding for each of the four steps. The table should have nine rows and four columns. Use the first row for the headings: Steps, Commodities, Joan, and Peter. Every two rows of the next eight represent one step. Identify the product under the Commodities column.
b. Write your findings for each step. For step two, show separately your analysis about how you selected the terms of trade and volume.
c. Show the outcome after trade in your graph.
6. (Optional) If you show in question 5 an alternative where in step IV Joan and Peter only gain and do not lose, you will earn an extra two points.
