Pat and Kris 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. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza? b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer? c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.
a. To find each roommate's opportunity cost of making a pizza, we need to determine how much root beer they could have produced during the time it takes to make a pizza.
For Pat:
Opportunity cost of making a pizza = (Time to brew root beer) / (Time to make a pizza) = 4 gallons / 2 hours = 2 gallons/hour
For Kris:
Opportunity cost of making a pizza = (Time to brew root beer) / (Time to make a pizza) = 6 gallons / 4 hours = 1.5 gallons/hour
The roommate with the absolute advantage in making pizza is the one who can make pizzas in less time. In this case, Pat takes 2 hours to make a pizza, while Kris takes 4 hours. Therefore, Pat has the absolute advantage in making pizza.
The roommate with the comparative advantage in making pizza is the one who has a lower opportunity cost of making a pizza. In this case, Kris has an opportunity cost of 1.5 gallons/hour, while Pat has an opportunity cost of 2 gallons/hour. Therefore, Kris has the comparative advantage in making pizza.
b. If Pat and Kris trade foods with each other, the roommate who will trade away pizza in exchange for root beer is the one who has a lower opportunity cost of making pizza. As calculated earlier, Kris has a lower opportunity cost of making pizza, so Kris will trade away pizza in exchange for root beer.
c. To determine the highest and lowest price at which pizza can be traded that would make both roommates better off, we need to consider their opportunity costs and their personal values.
Assuming their personal values are equal, the highest price at which pizza can be traded is determined by Kris's opportunity cost of making pizza, which is 1.5 gallons/hour. Pat would be willing to trade his pizza for 1.5 gallons of root beer or more.
The lowest price at which pizza can be traded is determined by Pat's opportunity cost of making pizza, which is 2 gallons/hour. Kris would be willing to trade his root beer for 2 gallons of pizza or less.
By trading at any price between Kris's opportunity cost and Pat's opportunity cost, both roommates would benefit from the trade, as they would be acquiring something they value more in exchange for something they value less.