Question

3. Problems and Applications Q3 Caroline and Frances are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Caroline takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Frances takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza. of root beer, and Frances's opportunity cost of making a pizza is Caroline's opportunity cost of making a pizza is of root beer. has an absolute advantage in making pizza, and has a comparative advantage in making pizza. If Caroline and Frances trade foods with each other, will trade away pizza in exchange for root beer. The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is of root beer, and the lowest price that makes both roommates better off is of root beer per pizza. Grade it Now Save & Continue Continue without saving

Answer 1

Caroline's opportunity cost of making a pizza is 2/3 = 0.67 gallons of root beer and France's opportunity cost of making a pizza is (5/7)=0.71 gallons of root beer.

Caroline has an absolute advantage in making pizza because he requires less labor hours to make pizza than Frances .

Because Caroline has a lower opportunity cost of making a pizza , this implies Caroline has a comparative advantage in making pizza.

If Caroline and Frances trade foods with each other , Caroline will trade away pizza in exchange for root beer.

The highest price at which pizza can be traded that would make both roommates better off is 5/7 =0.71 gallons of root beer per pizza and the lowest price that makes both roommates better off is 2/3 =0.67 gallons of root beer per pizza.