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

----Michele's opportunity cost of potatoes= 50/200= 0.25 chicken
-----Michele's opportunity cost of chickens= 200/50= 4 potatoes

-----James' opportunity cost of potatoes= 40/80= 0.5 chicken
-----James' opportunity cost of chickens= 80/40= 2 potatoes

-----(absolute advantage means greatest output per year if they do only that one thing)

Michele has absolute advantage for both raising potatoes and raising chickens.

------(comparative advantage means gives up the least to get one unit of the specified good.)
Michele has comparative advantage for raising potatoes.
James has comparative advantage for rising chickens.

------Yes, they would be better off because Michele gives him 50 potatoes and in return she will get 20 chickens. If they do not this trade, Michele can have again 150 potatoes, but 17 chickens this time. Also, James can have only 40 potatoes and 20 chickens again. Therefore, they would be better off if they specialize and then trade.
-----For nations or societies, the situation is same. If each entity does the activity in which they have comparative advantage, they can trade and be better off.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.