Question

Barbara and Joe both have 10 hours of time available, which they can use to either make hotdog or make pizza. Barbara can make 10 pizzas in one hour or 10 hotdogs in one hour. Joe can make 6 pizzas in one hour or 3 hotdogs in one hour.

c.) Suppose that Barbara and Joe cannot trade with each other. If Barbara wants to consume an equal number of hotdogs and pizzas, how many hotdogs and pizzas can Barbara consume? If Joe also consumes an equal number of pizzas and hotdogs, how many pizzas and hotdogs can Joe consumer?

f.) Who has comparative advantage in the production of pizzas?

g.) Who has comparative advantage in the production of hotdogs?

h.) If Barbara and Joe decide to specialize and trade, what good should Barbara specialize in producing? What good should Joe specialize in producing? Why?

i.) Suppose that Barbara and Joe are producing and consuming the amounts of hamburgers and pizzas in part c. Give an example of a mutually beneficial trade between Barbara and Joe that will allow both Barbara and Joe to consume more of both goods than they do in part c.

Answer 1

c)

If Barbara wants to consume equal amount of pizza and hotdogs i.e. X

Time consumed in making X pizza=(X/10)

Time consumed in making X hotdogs=(X/10)

Total time consumed=(X/10)+(X/10)=10

2(X/10)=10

X=50

i.e. Barbara can consume 50 pizza and 50 hotdods in available working time.

If Joe wants to consume equal amount of pizza and hotdogs i.e. X

Joe can make 6 pizzas in one hour or 3 hotdogs in one hour.

Time consumed in making X pizza=(X/6)

Time consumed in making X hotdogs=(X/3)

Total time consumed=(X/6)+(X/3)=10

3X/6=20

i.e. Joe can consume 20 pizza and 20 hotdods in available working time.

d)

Barbara's opportunity cost of 1 pizza=10/10=1 hotdog

Joe's opportunity cost of 1 pizza=3/6=1/2 hotdog

Joe's opportunity cost making pizza is less. So, Joe has comparative advantage in making pizza.

e)

Barbara can make 10 pizzas in one hour or 10 hotdogs in one hour. Joe can make 6 pizzas in one hour or 3 hotdogs in one hour.

Barbara's opportunity cost of 1 hotdog=10/10=1 pizza

Joe's opportunity cost of 1 hotdog=6/3=2 pizza

Barbara's opportunity cost making hotdog is less. So, Barbara has comparative advantage in making hotdog.

f)

Joe has comparative advantage in making pizza. So, Joe will specialize in making pizza.

Barbara has comparative advantage in making hotdog. So, Barbara will specialize in making hotdogs.

e)

Suppose Barbara makes hotdogs only. he can make a maximum of 10*10=100 hotdogs

Suppose Joe makes pizza only. he can make a maximum of 6*10=60 pizza

Case of Barbara

We have determined in part(c) that Barbara can consume 50 pizza and 50 hotdods in available working time.

Out of 100, Barbara can consume 50 hotdogs and 50 hotdogs can be traded.

Joe's opportunity cost of 1 hotdog=6/3=2 pizza

Joe will be happy to exchange 2 pizza with 1 hotdog. To get 50 pizza from Joe, Barbara should give 25 hotdogs. Even after consuming 50 pizza and 50 hotdods, Barbara with left with extra 25 hotdogs.

Now consider the case of Joe

i.e. Joe can consume 20 pizza and 20 hotdods in available working time.

Joe can make a maximum of 6*10=60 pizza

To remain at the same level of consumption, 20 pizza can be consumed and 40 pizza can be traded.

Barbara's opportunity cost of 1 pizza=10/10=1 hotdog

Barbara will be happy to exchange 1 pizza with 1 hotdog. To get 20 hotdogs from Barbara, Joe should give 20 pizza. So, even after consuming 20 pizza and 20 hotdods, Joe is still left with extra 20 pizzas.

We find the consumption level of goods increases after trade.