This is Microeconomics:Suppose that two people, Michelle and James each live alo

Question

This is Microeconomics: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

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What is Michelle’s opportunity cost of producing potatoes?
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What is Michelle’s opportunity cost of producing chickens?
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What is James’ opportunity cost of producing potatoes?
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What is James’ opportunity cost of producing chickens?
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Which person has an absolute advantage in which activities?
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Which person has comparative advantage in potatoes?
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Which person has comparative advantage in chicken?
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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.
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How would you extend the above narrative to businesses, society as a whole or nations? Explain.

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Explanation / Answer

Michelle James Potatoes 200 80 Chickens 50 40 What is Michelle’s opportunity cost of producing potatoes? 4 chickens, per potato What is Michelle’s opportunity cost of producing chickens? .25 potatoes per chicken What is James’ opportunity cost of producing potatoes? 2 chickens per potato What is James’ opportunity cost of producing chickens? .5 potatoes per chicken Which person has an absolute advantage in which activities? Michelle has the absolute advantage in both activities; she can make more chickens and potatoes than James can, with the same resources Which person has comparative advantage in potatoes? James Which person has comparative advantage in chicken? Michelle 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. Michelle’s opportunity cost of producing a chicken is .25 potatoes, so 2.5 potatoes for 1 chicken is a great deal for her. James’ opportunity cost of producing 2.5 potatoes is 5 chickens, so the trading rate is not good for him, because he would get only 1 chicken. How would you extend the above narrative to businesses, society as a whole or nations? Explain. Trade can oftentimes be beneficial to two parties, but only if the rate of exchange is such that both people get better deals than they would if they were independently producing.

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