Answer to Question #102838 in Macroeconomics for Yash Chandrashekhar ahire

Question

Suppose that Joe can produce 10 Pizzas or 100 Beers per day. Meanwhile, Bob can produce 20 Pizzas or 40 Beers per day.

What determines who should produce beer and who should produce pizza (not just in this case but always)?

Answer 1

The production should be determined by a low opportunity cost when either producing Pizza or beer. An individual has a comparative advantage in the production of a particular good if she can produce it at a lower opportunity cost than other individuals. An individual has an absolute advantage in the production of a good if she can produce more of that good than another individual, using comparable amounts of time, raw materials, and effort.

Therefore, Joe should produce beer, and Bob should produce Pizza.