Question

Dina and Juanita are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Dina takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Juanita takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza.

Dina's opportunity cost of making a pizza is 2/3 gallon/ 5/7 gallon/ 1 1/2 gallons/ 1 2/5 gallon of root beer, and Juanita's opportunity cost of making a pizza is 2/3 gallon/ 5/6 gallon/ 1 1'2 gallon/ 1 2/5 gallons of root beer.

Dina/ Jaunita has an absolute advantage in making pizza, and Dina/ Jaunita has a comparative advantage in making pizza.

If Dina and Juanita trade foods with each other, Jaunita/ Dina will trade away pizza in exchange for root beer.

The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is 2/3 gal/ 5/7 gal/ 1 1/2 gal/ 1 2/5 gal of root beer, and the lowest price that makes both roommates better off is 2/3 gal/ 5/7 gal/ 1 1/2 gal/ 1 2/5 gal of root beer per pizza.

Answer 1

Dina can brew 1/3 gallons of root beer in one hour and she can make 1/2 of a pizza in one hour. Juanita can brew 1/7 gallon of root beer in one hour as well as 1/5 of a pizza in hour.

Dina's opportunity cost of making a pizza is therefore 1/3 divided by 1/2 or 2/3 gallons of root beer. Juanita's opportunity cost of making a pizza is 1/7 divided by 1/5 = 5/7 gallons of root beer. Absolute advantage comes from the ability of more production in the same time. Dina can brew 1/3 gallons of root beer in one hour while Juanita can brew 1/7 gallon of root beer in one hour. Hence Dina has an absolute advantage in making beer. Similarly, Dina can make 1/2 of a pizza in one hour and Juanita can make 1/5 of a pizza in one hour. So Dina has absolute advantage in making pizza. Comparative advantage comes in from lower opportunity cost.

Dina's opportunity cost of making a pizza is lower than Jaunita and so Dina has a comparative advantage in making pizza.

If Dina and Juanita trade foods with each other, Dina will trade away pizza in exchange for root beer. Trade price will lie between the opportunity costs. Hence trade price pizza ranges from 2/3 gallons of root beer to 5/7 gallons of root beer

The highest price at which pizza can be traded that would make both roommates better off is 5/7 gal of root beer, and the lowest price that makes both roommates better off is 2/3 gal of root beer per pizza.