Suppose two people, Mary and John each live in an isolated region. They each hav

Question

Suppose two people, Mary and John each live in an isolated region. They each have the same resources availabe and they grow corn and raise pigs. Mary devotes all her resources to growing corn, which she raises 200 pounds of corn per year. Which she also raises pigs 50 pigs per year. John devotes all his resources to growing corn which he raises 80 pounds of corn per year. John also raises pigs, 40 pigs per year. What is Mary's opportunity cost of producing corn? What is Mary's opportunity cost of producing pigs? What is John's opportunity cost of producing corn? What is John's opportunity cost of producing pigs? Which person has a absolute advantage in both activities? Which person has comparative advantage in corn? Which person has compartative advantage in pigs? Suppose that they are thinking of specializing completely in the area in which they have a compartive advantage, and then trading at a rate of 2.5 pounds of corn for 1 pig, would they each be better off?

Explanation / Answer

Mary's opportunity cost of producing corn is 1/4 a pig, while her opportunity cost of producing pigs are 4 corn. John's opportunity cost of producing corn is 1/2 of a pig while his opportunity cost of producing a pig are 2 corn. Mary has the absolute advantage in both because she produces 200 corns and 50 pigs in a year, while John only produces 80 corns and 40 pigs. Mary has a comparartive advantage in corn because she has a smaller opportunity cost of producing corn than John. John has a comparative advantage in pigs because he has a smaller opportunity cost in producing pigs. Yes they would be better off because if they dont trade and instead produce it themselve they wont win anything, but by trading Mary saves 1.5 of corn and John wins .5 of pigs.

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