Question

Two friends, Rachel and Joey, enjoy baking bread and making apple pies. Rachel takes 3 hours to bake a loaf of bread and 2 hours to make a pie. Joey takes 4 hours to bake a loaf of bread and 6 hours to make a pie.

(3 points) In 24 hours, how many apple pies can Rachel make? How many apple pies can Joey make in the same time period? Who has the absolute advantage in baking pies? (5 points) Draw a PPF for Rachel and a PPF for Joey. Use your PPFs to calculate Rachel’s and Joey’s opportunity cost of baking bread. Who has a comparative advantage in making bread? (2 points) If both friends specialize, what does each friend produce and how much?

Answer 1

Rachel takes 3 hours to bake a loaf of bread so in 24 hours she will make 8 loaves. In 24 hours, with a time of 2 hours to make a pie, she will make 12 pies. In 24 hours, while Joey takes 4 hours to bake a loaf of bread, he will bake 6 loaves and with 6 hours to make a pie, he will make 4 pies.

Rachel has absolute advantage in baking pies as well as bread because she produces 12 pies or 8 bread loaves which is more than what Joey can produce in 24 hours.

PPF for Rachel and a PPF for Joey are drawn below.

Rachel can produce 12 pies or 8 loaves of bread so that her opportunity cost of bread is 12/8 = 1.5 pies and Joey’s opportunity cost of baking bread is similarly 4/6 = 0.667.

Since opportunity cost of baking bread is lower for Joey, he has a comparative advantage in making bread and Rachel has comparative advantage in production of pies. If both friends specialize, Joey produces 6 loaves of bread and Rachel produces 12 pies.