3. Problems and Applications 03 Ginny and Lucia are roommates. They spend most o

Question

3. Problems and Applications 03 Ginny and Lucia are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Ginny takes 5 hours to brew a gallon of root beer and 3 hours to make a pizza. Lucia takes 8 hours to brew a gallon of root beer and 4 hours to make a pizza. Ginny's opportunity cost of brewing a gallon of root beer is , and Lucia's opportunity cost of brewing a gallon of root beer is -has an absolute advantage in brewing root beer, and has a comparative advantage in brewing root beer. - If Ginny and Luca trade foods with each other, will trade away pizza in exchange for root beer. The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is of root beer, and the lowest price that makes both roommates better off is of root beer per pizza. Check Answer Save & Continue Continue without saving

Explanation / Answer

Ginny takes 5 hours to brew a gallon of root beer and 3 hours to make a pizza.

This means opportunity cost of brewing a gallon of root beer is (5/3) 1.67 pizza and the opportunity cost of making 1 pizza is (3/5) 0.6 gallons of root beer.

Lucia takes 8 hours to brew a gallon of root beer and 4 hours to make a pizza.

This means the opportunity cost of brewing a gallon of root beer is (8/4) 2 pizzas and the opportunity cost of making 1 pizza is (4/8) 0.5 gallons of root beer.

Ginny can produce root beer at lower opportunity cost while Lucia can produce pizza at the lower opportunity cost.

So,

Ginny's opportunity cost of brewing a gallon of root beer is 1.67 pizzas, and Lucia's opportunity cost of brewing a gallons of root beer is 2 pizzas.

Ginny has absolute advantage in brewing root beer, and Ginny has a comparative advantage in brewing root beer.

If Ginny and Lucia trade foods with each other, Lucia will trade away pizza in exchange for root beer.

The highest price at which pizza can be traded that would make both roommates better off is 0.6 gallons of root beer, and the lowest price that makes both roommates better off is 0.5 gallons of root beer per pizza.

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