Question

Sarah Stephen Baking Cakes 75 cakes/day 60 cakes/day Baking Muffins 25 muffins /day 40 muffins /day A) Suppose that there are two people trading two different goods. If the table (above) shows the output each person produces in the same measure of time, please show who has the Absolute Advantage in Cakes and who has the Absolute Advantage in Muffins B) Please demonstrate who has the Comparative Advantage in Cakes and who has the Comparative Advantage in Muffins? Be sure to show your work, 1 i 1 ; ;

Answer 1

Absolute Advantage means who can produce more by same resources

Hence Sarah can produce 75 cakes and Stephen can produce 60 cakes hence Sara has absolute advantage in Cakes

Sarah can produce 25 muffins and Stephen can produce 40 muffins hence Stephen has absolute advantage in Muffins

Sarah can produce 75 cakes and 25 muffins hence Sara has opportunity cost of 25/75 i.e 0.33 muffins for producing cakes, while Stephen can produce 60 cakes and 40 muffins hence Stephen has opportunity cost of 40/60 i.e 0.67 muffins for producing cakes.

Hence Sarah can produce cake at lower opportunity cost hence  Sara has Comparative advantage in Cakes

Sarah can produce 75 cakes and 25 muffins hence Sara has opportunity cost of 75/3 i.e 3 cakes for producing muffins, while Stephen can produce 60 cakes and 40 muffins hence Stephen has opportunity cost of 60/40 i.e 1.5 cakes for producing muffins.

Hence Stephen can produce muffins at lower opportunity cost hence  Stephen has Comparative advantage in muffins