Question

Andrew and Beth can each spend 10 hours a day making bread or making shoes. Andrew makes 2 shoes an hour and Beth 3 shoes an hour. Andrew can bake 10 loaves an hour and Beth 9 loaves an hour.

What is A's O.Cost making shoes in terms of bread?

What is A's O.cost of bread in terms of shoes?

Who has the relative (comparative) advantage in making shoes?

Who has the relative (comparative) advantage in making bread?

Answer 1

Ans. For Andrew

The opportunity cost of making Shoes

2 shoes = 10 loaves of bread

1 shoe = 10/2 loaves of bread

1 shoe = 5 loaves of bread

Hence, Andrew's opportunity cost of making shoes is 5 loaves of bread.

The opportunity cost of making Bread

10 loaves of bread = 2 shoes

1 loaf of bread = 2/10 shoe

1 loaf of bread = 0.20 shoe

Hence, Andrew's opportunity cost of bread is 0.20 shoes.

For Beth

The opportunity cost of making Shoes

3 shoes = 9 loaves of bread

1 shoe = 9/3 loaves of bread

1 shoe = 3 loaves of bread

The opportunity cost of making Bread

9 loaves of bread = 3 shoes

1 loaf of bread = 3/9 shoe

1 loaf of bread = 0.33 shoe

Beth has a relative advantage in making shoes because of the lower opportunity cost of making shoes ( i.e. 1 shoe = 3 loaves of bread).

Andrew has a relative advantage in making bread because of the lower opportunity cost of making bread ( i.e. 1 loaf of bread = 0.20 shoes).