Question

Brenda and Sam produce Bread and Shirts per hour consistent with the following table.

	Brenda	Sam
Bread per hour	6	1
Shirts per hour	2	1

a). Who have comparative advantage in bread production?

b). Who has comparative advantage in shirt production?

c). Is trade profitable between the two?

Answer 1

Answer : For Brenda :

6 bread per hour = 2 shirts

=> 1 bread per hour = 2/6 = 0.33 shirt.

Therefore, the opportunity cost of 1 bread is 0.33 shirt.

Again, 2 shirts per hour = 6 breads

=> 1 shirt per hour = 6/2 = 3 breads.

Therefore, the opportunity cost of 1 shirt is 3 breads.

For Sam :

1 bread per hour = 1 shirt

So, the opportunity cost of 1 bread is 1 shirt. Similarly, here the opportunity cost of 1 shirt is 1 bread.

a) As Brenda has lower opportunity cost for 1 bread, hence Brenda has the comparative advantage in producing bread.

b) As Sam has lower opportunity cost for 1 shirt, hence Sam has the comparative advantage in producing shirt.

c) Trade occurs here between Breanda and Sam based on comparative advantage in production. As Brenda has comparative advantage in bread production and Sam has comparative advantage in shirt production, hence trade will be profitable between two if Brenda export bread in terms of importing shirt or Sam export shirt in terms of importanting bread.