Question

1. Suppose Clara can either make 12 pizzas or 4 cakes per day, while Karl can make either 5 pizzas or 10 cakes per day. Who has the comparative advantage in pizza, and who in cakes? What are their opportunity costs of making one pizza? How can this couple gain by living together compared to living apart? Graph the two PPFs.

Answer 1

• For Clara , the opportunity cost of making a Pizza is 0.33 ( 4/12) Cakes & opportunity cost of making a cake is 3 (12/4) Pizzas.
• For Karl , the opportunity cost of making a Pizza is 2 (10/5)  Cakes & opportunity cost of making a cake is 0.50 (5/10)  Pizzas.
• Hence Clara has comparative advantage in producing Pizza & Karl have comparative advantage in producing Cake.
• As both Clara & Karl requires both Pizzas & Cakes , So if they are living separately and utilizing half day for producing Pizza & another half for producing Cakes. In this manner they together would have produced 8.5 Units of Pizza & 7 units of cakes.
• On the other hand if they are living together then both will produce only that commodity for which they have comparative advantage. Hence Clara will produce 12 units of pizza & Karl will produce 10 cakes. Hence together they have produced 12 units of Pizzas & 10 units of cakes. If we compare this result with the result when they are living separately then we can clearly see the gain by living together.
  clara Gokes 12 →PPF व5 12 Kerl Cafes 12 -) PPE 12 Pizzas