Comparative Advantage Assuming constant opportunity costs, suppose Mickey can pr
ID: 1134306 • Letter: C
Question
Comparative Advantage Assuming constant opportunity costs, suppose Mickey can produce either 800 cheese and 0 crackers, or 0 cheese and 200 crackers; and Minnie can produce either 150 cheese and C crackers, or 0 cheese and 450 crackers. a. State who has a comparative advantage in cheese. Explain why. (5 points) b. Without trade Mickey produces 400 cheese and 100 crackers, and Minnie produces 100 cheese and 150 crackers. If the terms of trade are 1 cheese 1 cracker, what are the gains from specialization and trade for each good to each trader if Mickey trades 200 units of the good he has a comparative advantage in? (5 points)Explanation / Answer
Answer
a)
If Mickey uses his given resources then he can either produce 800 cheese or 200 crackers. Hence If Mickey produces 800 cheese then he must sacrifice 200 crackers. As opportunity cost is constant. Hence If she produces 1 cheese then he must sacrifice 200/800 = 1/4 = 0.25 crackers. Hence Opportunity Cost of cheese for mickey = 0.25 crackers.
If Minnie uses her given resources then she can either produce 150 cheese or 450 crackers. Hence If Minnie produces 150 cheese then he must sacrifice 450 crackers. As opportunity cost is constant. Hence If she produces 1 cheese then she must sacrifice 450/150 = 3 = 3 crackers. Hence Opportunity Cost of cheese for minnie = 0.25 crackers.
Hence, As opportunity cost for producing cheese is less for Mickey hence, Mickey has comparative advantage in producing Cheese.
b)
As Mickey has comparative advantage in producing cheese, then minnie will have comparative advantage in producing crackers. Now, Nefore specialization Mickey have 400 cheese and 100 crackers and Minnie has 100 cheese and 150 crackers.
If they specializes then Mickey will produce only cheese. Hence he will produce 800 unit of cheese. Also Minnie will produce only Crackers. Hence she will produce 450 crackers. Now Mickey will trade 200 cheese as terms of trade is 1cheese for 1 cracker. Hence After Trade Mickey will have 600 cheese and 200 crackers. Similarly Minnie will have 200 cheese and 450 - 200 = 250 crackers.
Hence, Gains from trade For Mickey is :
Cheese -> 600 - 400 = 200 cheese
Crackers -> 200 - 100 = 100 Crackers
Hence, Gains from trade For Minnie is :
Cheese -> 200 - 100 = 100 cheese
Crackers -> 250 - 150 = 100 Crackers
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.