ECO 251 - PRINCIPLES OF MICROECONOMICS

Suppose that Kristen and Anna live in the beach of Santa Monica.They own a small business in which they make wristbands and pot holders and sell them to people on the beach.As shown in the table, Kristen can make 15 wristbands per hour but only 3 pot holders.Anna is a bit slower and can make only 12 wristbands or 2 or pot holders in an hour.

Output per hour

Wristbands

Pot Holders

Kristen

15

3

Anna

12

2

1. For Kristen and for Anna, what is the opportunity cost of a pot holder? Who has a comparative advantage in the production of pot holders? Explain your answer.
2. Who has the comparative advantage in the production of wristbands? Explain your answer.
3. Assume that Kristen works 20 hours per week in the business.Assuming Kristen is in the business on her own, graph the possible combinations of pot holders and wristbands that she could produce in a week.Do the same for Anna.
4. Suppose that Kristen and Anna can sell all their wristbands for $1 each and all their pot holders for $5.50 each.If each of them worked 20 hours per week, how should they split their time between wristbands and pot holders? What is their maximum joint revenue?