Michelle has 200lbs of potatoes and 50 cchickens. James has 80lbs of potatoes and 40 chickens. what is Michelles opportunity cost of producing potatoes and opportunity cost of producing chickens? Same for James. Which person has an abosolte advantage in which activities? Suppose that they are thinking os each specializing in the area in which they have a comparative advantage and then trading at a rate of 2.5 lbs of potatoes for 1 chicken, would they each be beter off? Explain
To calculate the opportunity cost of producing potatoes and chickens for both Michelle and James, we need to compare the ratio of how much of one good they have to give up in order to produce more of the other. Opportunity cost measures the value of the next best alternative forgone when making a choice.
Let's start with Michelle:
Opportunity cost of producing potatoes for Michelle can be calculated by comparing the number of chickens she gives up to produce additional pounds of potatoes. She has 200 pounds of potatoes and 50 chickens. To produce more potatoes, she would give up 1 chicken for every 4 pounds of potatoes (50 chickens / 200 pounds of potatoes).
Opportunity cost of producing chickens for Michelle can be calculated by comparing the number of pounds of potatoes she gives up to produce additional chickens. She would give up 4 pounds of potatoes for every 1 chicken (200 pounds of potatoes / 50 chickens).
Now let's look at James:
Opportunity cost of producing potatoes for James can be calculated similarly. He has 80 pounds of potatoes and 40 chickens. So, to produce more potatoes, he would give up 1 chicken for every 2 pounds of potatoes (40 chickens / 80 pounds of potatoes).
Opportunity cost of producing chickens for James can be calculated by comparing the number of pounds of potatoes he gives up to produce additional chickens. He would give up 2 pounds of potatoes for every 1 chicken (80 pounds of potatoes / 40 chickens).
Comparing the opportunity costs, we can determine who has an absolute advantage in each activity. An absolute advantage means being able to produce more of a good using the same amount of resources (or producing the same amount of a good using fewer resources).
For Michelle, her opportunity cost of producing potatoes is 1 chicken for every 4 pounds of potatoes, while James' opportunity cost is 1 chicken for every 2 pounds of potatoes. James has a lower opportunity cost in producing potatoes, so he has an absolute advantage in potato production.
For Michelle, her opportunity cost of producing chickens is 4 pounds of potatoes for every 1 chicken, while James' opportunity cost is 2 pounds of potatoes for every 1 chicken. Michelle has a lower opportunity cost in chicken production, so she has an absolute advantage in chicken production.
Now, let's consider if they specialize in their respective areas of comparative advantage and trade at a rate of 2.5 lbs of potatoes for 1 chicken. Comparative advantage means being able to produce a good at a lower opportunity cost compared to others.
Since James has a lower opportunity cost in potato production, he should specialize in potato production. Michelle, on the other hand, has a lower opportunity cost in chicken production, so she should specialize in chicken production.
By specializing in their areas of comparative advantage and trading, both Michelle and James will be better off. They can exchange the excess potatoes and chickens they produce based on the rate of 2.5 lbs for 1 chicken. This allows them to obtain both goods at a lower opportunity cost than if they tried to be self-sufficient and produce both goods themselves.
Through specialization and trade, they can capitalize on their individual strengths and benefit from the lower opportunity cost of the other person, resulting in increased overall production and a more efficient allocation of resources.