Comparative Advantage Assuming constant opportunity costs, suppose Mickey can pr
ID: 1138950 • 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 0 crackers, or 0 cheese and 450 crackers. State who has a comparative advantage in cheese. Explain why. (5 points) Without trade Mickey produces 400 cheese and 100 crackers, and Minnie produces 100 cheese and 150 crackers. If the terms of trade are 1 deese 1 cracker, what are the gains from s if Mickey trades 200 units of the good he has a comparative advantage in? (5 points) b. alization and trade for each good to each traderExplanation / Answer
a) Mickey has a comparative advantage in the production of Cheese and Minnie has a comparative advantage in the production of Cracker. As Mickey can produce 800 cheese or 200 crackers the opportunity cost of producing cheese is 4 cheese per cracker. And for Minnie, the opportunity cost of cheese is (150/450) 0.33 cracker. So, Minnie will give up production of goods where the opportunity cost is less.
b) After specialization mickey will produce only 400 cheese and Minnie will produce only 150 crackers. If they trade and exchange 200 cheese for 200 crackers total gain from trade will be as follows.
The opportunity cost of 200 crackers for Mickey will be 800 cheese (its 4 cheese per cracker) but here, he is giving up only 200 cheese for that. Total gain from trade is 600 cheese.
The opportunity cost of 1 cheese for Minnie is 0.66 cracker (100/150). The opportunity cost of the cracker will be 150/100 = 1.5. For every single cracker produced Minnie can produce 1.5 cheese. Here, she is giving up 200 cheese or she can produce 200 x1.5 = 300 cracker. she is exchanging it for 200 crackers. The gain from trade is 100 crackers.
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