Question

3. Suppose that there are two workers in an economy, Rick and Morty. Every day, they can produce time machines or beer. If Rick spends all of his time on time machines, he can make 1000 time machines. If Rick spends all of his time on beer, he can produce 500 beers. If Morty spends all of his time on time machines, he can produce 1 time machine. If Morty spends all of his time on beer, he can produce 5 beers.

1. (e) (1 point) Who has the absolute advantage in producing time machines?

2. (f) (1 point) Who has the absolute advantage in producing beers?

3. (g) (1 point) Who has the comparative advantage in producing time machines?

4. (h) (1 point) Who has the comparative advantage in producing beers?

5. (i) (1 point) Were Rick and Morty to trade with each other, at what range of prices might they be able to do so and still both be better off?

Answer 1

(e). Rick has the absolute advantage in time machine production because Rick produce 1000 time machines which is more compare to Morty who 1 time machine by spending all the time.

(f). Rick has the absolute advantage in beer production because Rick produce 500 beers which is more than Morty who produce 5 beers by spending all the time. Rick has more beer production (500) than Morty(5). So Rick has absolute advantage in beer production.

(g). In case of Rick who can produce 1000 time machines or 500 beers. So for 1 time machine Rick has to sacrifice 1/2 beers. On the other hand Morty can produce 1 time machine or 5 beers. So Morty has to sacrifice 5 beers for 1 time machine. Therefore Rick has to sacrifice less amount of beers (1/2 beer) for 1 time machine than Morty who sacrifice 5 beers for 1 time machine. So Rick has comparative advantage in time machine production.

(h). In case of beer production Rick can produce 500 beers or 1000 time machine. Therefore Rick has to sacrifice 1000/500 = 2 time machine for one beer production. In case of Morty 5 beers = 1 time machine, or 1 beer = 1/5 time machine. So Morty has to sacrifice 1/5 time machine for 1 beer. Therefore we can say Morty has to sacrifice less (1/5 time machine) for 1 beer than Rick who sacrifice 2 time machines for 1 beer.

(i) . The production in terms of comparative advantage is 1000 time machines and 5 beers. So they can trade with 1 beer = 200 time machines. With this they can both be better off.