Suppose we have a 2-person world, with only Stephen and his friend LeBron. Suppose that Stephen...
Suppose we have a 2-person world, with only Stephen and his
friend LeBron. Suppose that Stephen can move 70 boxes or bake 28
cookies in an hour. Suppose that LeBron could move 16 boxes or bake
4 cookies in an hour. Is trade possible?
Choose one:A. No, trade isn’t possible, because
LeBron has an absolute advantage in both making cookies and moving
boxes.B. Yes, trade is possible. Stephen should move boxes while
LeBron makes cookies, because Stephen has a comparative advantage
in moving boxes, whereas LeBron has a comparative advantage in
making cookies.C. Yes, trade is possible. Stephen should make
cookies while LeBron moves boxes, because Stephen has a comparative
advantage in making cookies and LeBron has a comparative advantage
in moving boxes.D. No, trade isn’t possible, because Stephen has an
absolute advantage in both making cookies and moving boxes.
Homework Answers
The information provided in this Question can be tabulated in the Table as follows.
| Move Boxes | Bake Cookies | |
| Stephen | 70 | 28 |
| LeBron | 16 | 4 |
Based on the information provided in the Table above, Stephen can move 70 boxes or bake 28 cookies using all the resources available to him. On the other hand, his friend LeBron can move 16 boxes or bake 4 cookies using all the resources available to him.
Going by the Theory of Absolute Advantage, if all resources are used in moving boxes, Stephen can move 70 boxes while LeBron can move only 16 boxes. Similarly, if all resources are used in baking cookies, Stephen can bake 28 cookies while LeBron can bake only 4 cookies. Thus, Stephen has an absolute advantage over his friend LeBron in both moving boxes as well as in baking cookies.
Now, let us move to explanation of theory of comparative advantage based on the information provided in the table.
As Stephen can move 70 Boxes or bake 28 cookies, for Stephen, the opportunity cost of moving 1 box is equal to baking 28/70 cookies which in turn equals 0.4 cookies. Similarly, as LeBron can move 16 Boxes or bake 4 cookies, for LeBron, the opportunity cost of moving 1 box is equal to baking 4/16 or 0.25 cookies. Thus, the opportunity cost of moving boxes is lower for LeBron as it costs him baking only 0.25 cookies for moving one box, whereas it costs Stephen baking 0.4 cookies for moving one box. Thus, LeBron has a comparative advantage in moving boxes.
With regards to baking cookies, for Stephen, the opportunity cost of baking 1 cookie is equal to moving 70/28 boxes which in turn equals moving 2.5 boxes. Similarly, for LeBron, the opportunity cost of baking 1 cookie is equal to moving 16/4 boxes which in turn equals 4 boxes. Thus, for Stephen, the opportunity cost of baking 1 cookie is equal to moving 2.5 boxes whereas, for LeBron, the opportunity cost of baking 1 cookie is equal to moving 4 boxes.
Therefore, the opportunity cost of baking cookies is lower for Stephen as it costs him moving only 2.5 boxes for baking a cookie whereas for LeBron, it costs him moving 4 boxes to bake a cookie. Thus, Stephen has a comparative advantage in baking cookies.
Hence, Yes trade is possible as Stephen can make cookies in which he has a comparative advantage whereas, LeBron can move boxes in which he has a comparative advantage.
To conclude, from the four choices provided in the question, C. Yes, trade is possible. Stephen should make cookies while LeBron moves boxes, because Stephen has a comparative advantage in making cookies and LeBron has a comparative advantage in moving boxes, is the correct choice.
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