Answer to Question #315231 in Microeconomics for MMM

Question

Assume the following:

• Brad and Jenny both produce food and dishes;

• Constant opportunity costs;

• Brad can produce 100 tonnes of food or 100 tonnes of dishes;

• Jenny can produce 400 tonnes of food or 200 tonnes of dishes;

• In autarky (i.e. self-sufficiency without trade) each person produces both goods and the optimal mix before the trade for Brad is (80) tonnes of food and (20) tonnes of dishes. For Jenny, the optimal mix before the trade is (300) tonnes of food and (50) tonnes of dishes.

a) What is the opportunity cost of 1 tonne of food for Brad? What is the opportunity cost of 1 tonne of dishes for Brad? What is the opportunity cost of 1 tonne of food for Jenny? What is the opportunity cost of 1 tonne of dishes for Jenny?

b) Which person has a comparative advantage in food and which person has a comparative advantage in dishes?

c) What are the minimum terms of trade that each person would be willing to accept in order to trade?

Answer 1

a) Opportunity cost

For Brad, there are two options

100 tons (1 ton extra food =1 ton less dishes)

or

100 tons (1 ton extra dishes =1 ton less food)

For Jenny, there are two options

400 tons (1 ton extra food =1/2 ton less dishes)

or

200 tons (1 ton extra dishes =2 tons less food)

b) Comparative advantage

Brad has advantage in producing dishes,

because the opportunity cost of producing one ton of dishes is lower for Brad (1 ton of food) than for Jenny (2 tons of food).

Jenny on the other hand has an advantage in the production of food, because the opportunity cost of producing one ton of food is lower for him (1/2 ton dishes) than for Brad (1 ton dishes).