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.)


Potatoes
Chickens
Michelle
200
50
James
80
40
What is Michelle’s opportunity cost of producing potatoes?
What is Michelle’s opportunity cost of producing chickens?
What is James’ opportunity cost of producing potatoes?
What is James’ opportunity cost of producing chickens?
Which person has an absolute advantage in which activities?
Which person has comparative advantage in potatoes?
Which person has comparative advantage in chicken?
Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain.
How would you extend the above narrative to businesses, society as a whole or nations? Explain.

Explanation / Answer

Michelle's opportunity cost of producing potatoes is 1/4 of a chicken for every potato ( how many chickens she gives up to produce one potato 200:50) Similarly her opportunity cost of producing chickens is 4 potatoes for every chicken she produces James gives up 1/2 of a chicken for every potato he produces (his opportunity cost) and 2 potatoes for every chicken that he produces Michelle has the absolute advantage in producing both chickens and potatoes, however she only has the comparative advantage in producing potatoes (since she gives up fewer producing fewer chickens than James to produce a potato. James then, has the comparative advantage in producing chicken, giving up fewer potatoes for each chicken he produces If they specialized and traded at 2.5 pounds of potatoes for 1 chicken they would both be better off, since this is fewer potatoes than it costs her to produce a chicken, and more potatoes than it costs James to produce a 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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