(a) Suppose Emma can produce 2 cookie or 6 brownies per hour, and Seamus can produce...

(a) Suppose Emma can produce 2 cookie or 6 brownies per hour, and Seamus can produce 4 cookies or 4 brownies per hour. Explain who has an absolute and who has a comparative advantage for cookies and brownies.

(b) How would this explain trade between Emma and Seamus?

Solutions

Expert Solution

	Cookies per hour	Brownies per hour
Emma	2	6
Seamus	4	4

From the table we can see that Emma has an absolute advantage in the production of brownies and Seamus has an absolute advantage in the production of cookies.

Opportunity cost of production is given in the following table

	Opportunity cost of producing cookies	Opportunity cost of producing brownies
Emma	3 brownies(6/2)	0.33 cookies(2/6)
Seamus	1 brownie(4/4)	1 cookie(4/4)

Here Emma has a comparative advantage in the production of brownies with lower opportunity cost and Seamus has a comparative advantage in the production of cookies with lower opportunity cost.

b) Emma can produce and trade brownies and Seamus can produce and trade cookies. If Emma can exchange brownies for cookies from Seamus. If exchange is fixed as 2 brownies for 1 cookies, Emma earns 1 cookie by giving just 2 brownies whereas Seamus gets 2 brownies in exchange for just 1 cookie. Hence the trade is beneficial for both.

Rahul Sunny answered 2 months ago

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