Econ 201 1st Edition Lecture 7 Outline of Last Lecture 1.Beef and wheat example~~2.Anlaysize and find answer exampleOutline of Current Lecture 3. office problemCurrent LectureThe Office Problem Jim and Bill work in an office where they type letters and then prepare and stuff envelopes with the letters: one letter in each envelope, which constitutes one unit of “correspondence.” Their work rates can be described by the following simple production technology using either input - output coefficients or output - input coefficients. Jim has an absolute advantage in both production activities. But his advantage is relatively greater for stuffing, so we say Jim has a comparative advantage in stuffing.Bill has an absolute disadvantage in both production activities, but this disadvantage relatively isless for typing, so we say Bill has a comparative advantage in typing.It is helpful to understand this in terms of marginal opportunity cost.Comparative advantage lies with the worker having the lower marginal opportunity cost: Jim forEnvelopes and Bill for Letters. Problem: Suppose each person works 5 hours per day. 1. Construct three PPF’s - first for each person independently, and then for the two as a team.2. Find the maximum outputs for completed correspondence, i.e. letter & envelope for each PPF. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Use the graph space on the next page for all three PPF’s. Hint: Principle of Comparative Advantage Resources should be allocated where they have a comparative advantage. Thus Jim should specialize in stuffing and Bill in typing. With no specialization output would be 14 stuffed envelopes per hour. With specialization Bill only types. This gives 6 letters, which requires 6 minutes to stuff by Jim, leaving him 54 minutes for typing and stuffing on his own: 9 more stuffed envelopes for a total of 15 per hour. Answer keyAllocative Efficiency requires a particular product mix in this case: one letter for each envelope, so the L to E ratio should be 1:1. This is shown by a dashed line in the graph. Where this line crosses the three PPFs indicates output levels of “Correspondence”, i.e. units with one envelopefor each letter. If Bill and Jim work independently, rather than as a team, they ignore comparative advantage and outputs are: Jim: 10 units of correspondence per hour, 50 in a 5-hour day. Bill: 4 units of correspondence per hour, 20 in a 5-hour day. Total: 14 units of correspondence per hour, 70 in a 5-hour day. But if they follow comparative advantage, team production yields 15 units of correspondence per hour, 75 in a 5-hour day. Bill would never make any envelopes. In this example, there would be no emergence of a market to coordinate their production, but an effective Office Manager would make this efficient work assignment. This reveals an administrative resource allocation principle in contrast to the market allocation principle revealed in the Beef & Wheat
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