Question

4. Your roommate Pat decides to help with the party. The amounts of brownies and cookies which can be produced in an hour (if all resources are devoted to that good) are shown by the following table: YOU PAT COOKIES PER HOUR 20 BROWNIES PER HOUR 40 Where both cookies and brownies are measured in units. a. Who has an absolute advantage in producing brownies? Cookies? b. For you, what is the opportunity cost of producing one brownie? Of one cookie? c. For Pat, what is the opportunity cost of producing one brownie? Of one cookie? d. Should you and Pat specialize? Who should produce what? e. Suppose that you have so many guests that you have to split up the party into two rooms. You throw one party and Pat throws the other. What are the terms of trade? (At what rate would you each be willing to trade?) f. Using graphs for both you and Pat, show that trade allows each of you to achieve a point on your consumption possibilities curve which is greater than your production possibilities curve. Be sure to label all curves and axes. f. What is this principle called?

Answer 1

(a) You (i.e., the roommate of Pat) can produce more cookies per hour than the Pat. Hence, you has absolute advantage in the production of cookies.

You (i.e., the roommate of Pat) can produce more brownies per hour than the Pat. Hence, you has absolute advantage in the production of brownies.

(b) You can produce either a maximum of 20 cookies per hour or 40 brownies per hour.

For You, opportunity cost of producing one brownie = 20 / 40 = 0.5 cookies.

For You, opportunity cost of producing one cookie = 40 / 20 = 2 brownie.

(c) Pat can produce either a maximum of 5 cookies per hour or 20 brownies per hour.

For Pat, opportunity cost of producing one brownie = 5 / 20 = 0.25 cookies.

For Pat, opportunity cost of producing one cookie = 20 / 5 = 4 brownie.

(d) Pat has lower opportunity cost of producing brownie than the you. Hence Pat has the comparative advantage in the production of brownie and should specialize in the production of brownie.

Similarly, you should specialize in the production of cookie.

As per the HOMEWORKLIB POLICY, I answered first 4 part of the question.