Question

Explain the relation between resources, scarcity, opportunity cost, and production.

Sarah and her boyfriend Mike want to save some money to pay for their wedding. So they decided to help people in the neighborhood by cleaning their garages and mowing lawns. Sarah takes 60 minutes to clean a garage and 80 minutes to mow a lawn. Mike takes 80 minutes to clean a garage and 80 minutes to mow a lawn. Sarah and Mike devote 10 hours per week each to these activities and get paid $25 for each garage they clean and $25 for each lawn they mow. Sarah says to Mike: "I have an absolute advantage in cleaning and we are equally productive in mowing. Therefore I should do both cleaning and mowing but you should only mow lawns." Mike disagrees. He thinks Sarah should specialize in cleaning garages and he should specialize in mowing lawns. Help Sarah and Mike to resolve their dispute.

a) Who has an absolute advantage in cleaning garages? In mowing lawns? Explain.

b) Draw Sarah's and Mike's production possibilities frontiers. What are each individual's opportunity costs?

c) Who has a comparative advantage in cleaning garages? In mowing lawns? Explain.

d) Is Sarah right when she says that she should do both cleaning and mowing while Mike should only mow lawns? Or maybe Mike is right when he suggests that Sarah specializes in cleaning and he specializes in mowing? Illustrate and substantiate your answer with a numerical example.

Answer 1