Question

Pat and Kris are roommates. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza. These are their most preferred activities.

1. (a) What is Pat’s opportunity cost to produce one pizza Note that an opportunity cost should be ex- pressed in goods, not resources, given up.

2. (b) What is Kris’s opportunity cost to produce one pizza?

3. (c) Who has absolute advantage in producing root beer?

4. (d) Who has absolute advantage in producing pizza?

5. (e) Who has comparative advantage in producing root beer?

6. (f) Who has comparative advantage in producing pizza?

7. (g) If the roommates each make one food, who will produce pizza and who will produce root beer? Why?

The price of a sweater is $15. Julie’s marginal benefit of buying sweaters and Allie’s marginal costs of selling sweaters are listed below

Number of sweaters	Julie's Willingness to pay($)	Allie's Marginal Cost($)
1	50	5
2	35	8
3	30	12
4	23	18
5	12	25
6	8	32

1. (a) If Julie behaves rationally, how many sweaters will she buy?

2. (b) If Allie behaves rationally, how many sweaters will she sell?

3. (c) In a sentence, describe how Julie’s willingness to pay changes as the number of sweaters increases.

4. (d) In a sentence, describe how Allie’s marginal cost changes as the number of sweaters increases.

5. (e) Draw a supply and demand graph illustrating the market for sweaters.

6. (f) If Julie and Allie are allowed to negotiate the price of sweaters, how many would Allie sell to Julie and how much would Allie charge?

Answer 1

1. A) Pat takes 4 hours to brew 1 Gallon of root beer and 2 hours to make a pizza. It means, to produce 1 gallon of root beer, Pat needs to sacrifice 2 pizzas. Therefore, Pat's opportunity cost of producing 1 root beer is 2 pizzas. And conversely, opportunity cost of producing 1 pizza is (1/2) root beer.

B) Kris takes 6 hours to brew a gallon of root beer and and 4 hours to make a pizza. In 1 hour, Kris can make (1/4) pizza or brew (1/6) gallon of root beer. That means, to produce (1/4) pizza Kris needs to give up (1/6) gallon root beer. Or, to produce 1 pizza, he needs to give up [(1/6)/(1/4)] = (4/6) = (2/3) gallon of root beer. So, the opportunity cost of producing 1 pizza is (2/3) gallon of root beer.

C) Pat has Absolute advantage in producing root beer because he takes less time than Kris does, to produce 1 gallon of root beer. So, Pat's productivity is more than Kris' in Root beer production.

D) Pat has absolute advantage in pizza production because he takes less time than Kris takes to produce 1 pizza, which mean Pat's productivity is more than Kris.

E) Pat's opportunity cost of producing 1 root beer is 2 pizzas while Kris' opportunity cost of producing 1 root beer is 1/(2/3) = 3/2 = 1.5 pizzas. As, Kris's opportunity cost of producing 1 root beer is less than that of Pat's, therefore Kris has comparative advantage in root beer production.

F) Pat has comparative advantage in pizza production because Pat's opportunity cost of producing 1 pizza is less than that of Kris's.

G) If they each make one food, then they will specialize in the production in which they have comparative advantage. So, Pat will make pizza and Kris will make root beer.