Question

Please use the chart below to answer all questions 2 through 4 on this problem set. Amber's totalAmber's total Meredith's total Meredith s total production of wheat production of corn production of production of wheat corn Devote all time 20 lbs of wheat 0 lbs of corn to producing wheat 10 lbs of wheat 0 lbs of corn Devote all time 0 lbs of wheat 50 lbs of corn 0 lbs of wheat 25 lbs of corn to producing corn Note: Assume that both Amber and Meredith can produce any corresponding linear combination of pie and cake. Draw and label Amber's production possibility frontier (PPF). a) What is Amber's opportunity cost of producing a lb of wheat? b) What is Amber's opportunity cost of producing a lb of corn? 2. 3. Draw and label Meredith's production possibility frontier (PPF). a) b) What is Meredith's opportunity cost of producing a lb of wheat? What is Meredith's opportunity cost of producing a lb of corn? 4. Consider both Amber's PPF and Meredith's PPF: a) Who has the absolute advantage in producing wheat? b) Who has the absolute advantage in producing corn? e)Who has the comparative advantage in producing wheat? d) Who has the comparative advantage in producing corn? e) In this example, explain if there are any gains from Amber and Meredith trading.

Answer 1

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Opportunity cost of producing a lbs of wheat = 50/20 = 2.5 lbs of corn, Opportunity cost of producing a lb of corn = 20/50 = 0.4 lbs of wheat 2.5/10 = 2.5 lbs of corn 10/25 = 0.4 lbs of wheat Amber Amber Comparative advantage exists if one person has a lower opportunity cost to produce a good as compared to other person. But in this case, opportunity cost for both of them is same. So, no one has comparative advantage in producing wheat. No one has comparative advantage in producing corn. There will be no gains from trading.