GB3070

NAME:_________________
Application Problem Week # 1

1. Two producers, Alpha and Bravo, are each able to produce interactive CAD models and virtual
reality (VR) sets used for technical training of Navy sailors in various ratings. Given its technology
of production, it takes Alpha 8 hours of labor to generate a CAD model, and 16 hours of labor to
produce a VR set. Bravo requires only 3 hours of labor to generate a CAD model, and 15 hours of
labor to produce a VR set.

a. (2p) Show, in the same graph, the production possibility frontier (PPF) for each producer if
they each have 240 hours of labor available each month. Label the graph.

b. (1p) Which producer has the absolute advantage in producing a VR set? ________ CAD model?
__________ Justify your answer:

Bravo has absolute advantage on both VR sets and CAD Models because they can make each
unit in less time in both categories, resulting in more items made each month with the same
amount of hours worked.

c. (2p) Fill in the able each producer’s opportunity cost of producing one CAD model and VR set.

Alpha Bravo
Opp. Cost for producing one 0.5 VR 0.2 VR
CAD model
Opp. Cost for producing one 2 CAD 5 CAD
VR set

d. (2p) Which producer has the comparative advantage in producing a VR set? ______________
Which producer specializes in making VR sets? _________________
Justify your answer:

Alpha has the comparative advantage on producing VR sets because it only costs them 2
CADs instead of 5.

1
 Bravo specializes making VR sets because it only takes them 3 hours per set versus Alpha
taking 8 hours. Bravo would be able to build more sets in the same amount of time.

e. (1p) What is the trading range for VR sets in terms of CAD models?

The trading range would be between 2 and 5 CAD. Anything lower than 2 would be
bad for Alpha and anything over 5 would be bad for Bravo.

f. (2p) Alpha looses some administrative staff due to retirement. Instead of filling those
vacancies, it decides to ask its engineers to pick up some of the workload from the lost
administrative staff, because “they are smart enough to figure it out those tasks”. Is this a good
idea? ______ What concept(s) can be used to gain insight into the issue? _____________
Discuss briefly.

This is not a good idea. The time it would take for them to learn would not be beneficial in my
opinion. They need to compare the amount of time used to do the extra tasks and see how
much of their regular workload would be lost. They need to see the opportunity cost of having
the engineers do the work versus hiring someone knew. If they cost of losing work for the
engineers is less than the cost of hiring new staff, than it is worth it to have the engineers do it,
but I think the value will be outside of the trading range.