Suppose that two people, Michelle and James each live alone in an isolated regio

Question

Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds of potatoes per year. If she devotes all her resources to raising chickens, she can raise 50 chickens per year. (If she apportions some resources to each, then she can produce any linear combination of chickens and potatoes that lies between those extreme points.) If James devotes all his resources to growing potatoes, he can raise 80 pounds of potatoes per year. If he devotes all his resources to raising chickens, he can raise 40 chickens per year. (If he apportions some resources to each, then he can produce any linear combination of chickens and potatoes that lies between those extreme points.

How would you extend the above narrative to businesses, society as a whole or nations? Explain.

Explanation / Answer

The narrative relates the concepts of absolute and comparative advantages. Michelle has an absolute advantage in the production of potatoes and chickens since she can produce more of both. However, James has a comparative advantage in raising chickens, since he only gives up 2 lbs potatoes worth of production for each chicken, where Michelle must give up 4 lbs for every chicken. This relates to businesses, society and nations in that some are generally better than others at many things, however the opportunity cost of another business/society/nation may be lower, and in that way the business/society/nation that is better at both will focus on what it is best at, and the other can do what it is best at and the two can effect a mutually beneficial trade to get the products they desire

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