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 for potatoes is 1/4 chicken per lb potato Her OC for chicken is 4lb potatoes per chicken James' OC for potatoes is 1/2 chicken per lb potato His OC for chicken is 2lb potatoes per chicken. Michelle can make more of both, so she has the absolute advantage in both potatoes and in chickens. James has the comparative advantage in chicken, it only takes him two potatoes to equal a chicken Michelle has the comparative advantage in potatoes; she can get four potatoes for each chicken. If Michelle produced 200lb potatoes, she could trade 100 lb for all 40 of James's chickens. He would get 100lb potatoes, which is 20 lb more than he could produce if he devoted all of his resources to producing potatoes. She would get 40 chickens and keep 100 lb potatoes. If she hadn't traded, she would have been able to produce 100 lb potatoes (half her possible out put) and 25 chickens (half her possible output), so she gets an additional 15 chickens. So they are both better off. In business, if you can type faster than your secretary, it will almost undoubtedly still benefit the company for you to do your job and for your sectretary to do his or her job, since you are way better at the financial calculations and the secretary can type pretty well. In society, we should all try to pitch in where our strengths are the greatest. If there is something that you can do better than anyone else, it makes more sense that you do it. Perhaps if someone volunteers to coach your daughter's soccer team, you could mow his lawn. If you know nothing about soccer, you will come out ahead, even if he is better at mowing lawns. Nations: If one country has a lot of computer factories and the other has a lot of oil, the one with oil could trade for computers, even if the other country has its own oil reserves.

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