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

To determine the opportunity cost and comparative advantage, we need to understand the concepts first.

Opportunity cost: This refers to the value of the next best alternative that is given up when making a choice. In this case, it's the amount of one good that needs to be sacrificed to produce more of the other.

Comparative advantage: It refers to the ability of a person, business, or nation to produce a good at a lower opportunity cost than others. The concept highlights the efficiency gained by specializing in the activity where the opportunity cost is lower.

Now let's answer the questions based on the given information:

1. Michelle's opportunity cost of producing potatoes is 1 chicken for every 4 pounds of potatoes (200 potatoes / 50 chickens = 4 potatoes per chicken).
2. Michelle's opportunity cost of producing chickens is 0.25 pounds of potatoes for every chicken (50 chickens / 200 potatoes = 0.25 pounds of potatoes per chicken).
3. James' opportunity cost of producing potatoes is 0.5 chicken for every 1 pound of potatoes (40 chickens / 80 potatoes = 0.5 chickens per potato).
4. James' opportunity cost of producing chickens is 2 pounds of potatoes for every chicken (80 potatoes / 40 chickens = 2 potatoes per chicken).
5. Michelle has an absolute advantage in both potato production (200 potatoes compared to James' 80 potatoes) and chicken production (50 chickens compared to James' 40 chickens).
6. Michelle has a comparative advantage in potatoes since her opportunity cost of producing potatoes is lower (1 chicken per 4 pounds of potatoes) compared to James (0.5 chickens per 1 pound of potatoes).
7. James has a comparative advantage in chickens since his opportunity cost of producing chickens is lower (2 pounds of potatoes per chicken) compared to Michelle (0.25 pounds of potatoes per chicken).
8. If Michelle specializes in potato production and James specializes in chicken production, they can then trade based on their comparative advantages. In this scenario, if they trade at a rate of 2.5 pounds of potatoes for 1 chicken, both parties would benefit. Michelle can trade some of her excess potatoes for additional chickens, increasing her overall poultry supply. Similarly, James can trade some of his excess chickens for additional potatoes, increasing his overall potato supply. By specializing and trading, they can each acquire a variety of goods they wouldn't be able to produce on their own.

To extend this narrative to businesses, society, or nations, the concepts of opportunity cost and comparative advantage remain the same. By specializing in the activities where they have a comparative advantage, individual businesses can increase their efficiency and productivity. At the societal or national level, trade between different nations allows for each country to focus on their respective strengths and trade for goods and services they cannot produce as efficiently. This leads to overall economic growth, increased standards of living, and a more efficient allocation of resources on a global scale.