Problems & Applications (Ch 03) c Back to Assignment Attempts: Do No Harm: 4 3.

Question

Problems & Applications (Ch 03) c Back to Assignment Attempts: Do No Harm: 4 3. Problems and Applications Q3 Rina and Yvette are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Rina takes S hours to brew a gallon of root beer and 3 hours to make a pizza. Yvette takes 8 hours to brew a gallon of root beer and 4 hours to make a pizza. Rina's opportunity cost of brewing a gallon of root beer is , and Yvette's opportunity cost of brewing a gallon of root beer is has an absolute advantage in brewing root beer, and has a comparative advantage in brewing root beer If Rina and Yvette trade foods with each other will trade away pizza in exchange for root beer The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is of root beer, and the lowest price that makes both roommates better off isof root beer per pizza. Grade It Now Save & Continue Continue without saving O Type here to search

Explanation / Answer

Rina's opportunity cost of brewing a gallon of root beer = 5/3 pizzas

Yvette's opportunity cost of brewing a gallon of root beer = 8/4 = 2 pizzas

Rina has an absolute advantage in brewing root beer (can do it in less time) and Rina has a comparative advantage in brewing root beer (lower opportunity cost)

Yvette will trade away pizza in exchange for root beer. (she has a comparative advantage in making pizza)

Highest price = 3/5 pizza and lowest price = 1/2 pizza (reciprocal of their opportunity costs of a gallon of root beer)

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