Question

Megan and Susan 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. Megan takes 5 hours to brew a gallon of root beer and 3 hours to make a pizza. Susan takes 8 hours to brew a gallon of root beer and 4 hours to make a pizza.

Megan's opportunity cost of making a pizza is (1/2 gallon, 2 gallon, 3/5 gallon, 1 2/3 gallon)   of root beer, and Susan's opportunity cost of making a pizza is (1/2 gallon, 2 gallon, 3/5 gallon, 1 2/3 gallon)  of root beer.

(Megan/Susan)   has an absolute advantage in making pizza, and (Megan/Susan)   has a comparative advantage in making pizza.

If Megan and Susan trade foods with each other, (Megan/Susan) 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 (1/2 gallon, 2 gallon, 3/5 gallon, 1 2/3 gallon) of root beer, and the lowest price that makes both roommates better off is (1/2 gallon, 2 gallon, 3/5 gallon, 1 2/3 gallon) of root beer per pizza.

Answer 1

Megan's opportunity cost of making a pizza is equal to the amount of root beer she gives up in making pizza. Megan can make 1 pizza in 3 hours and if she spend this time in making root beer. She produce 1 boot beer in 5 hours. It means in 1 hour , she can produce 1/5 root beer . Therefore, in 3 hours , she can produce 3/5 gallons of root beer. Therefore, the opportunity cost of making a pizza for Megan = 3/5 gallon of root beer.

Similarly, for Susan - Susan opportunity cost of making a pizza is equal to the amount of gallons of beer she gives up in making pizza. Susan can make 1 pizza in 4 hours and if she spend this time in producing beer . She produces 1 gallon of beer in 8 hours . It means she can produce 1/8 gallon of beer in 1 hour. Therefore, in 4 hours , she can produce 4/8 gallons of root beer i.e 1/2 galloms of root beer. Hence, the opportunity cost of making pizza for Susan is 1/2 gallon of root beer.

Megan has an absolute advantage in making pizza because magan takes less hours in making pizza i.e 3 hours, compare to Susan i.e 4 hours.,

Susan has a comparative advantage in making pizza because she has a lower opportunity cost in making pizza i.e 1/2 gallons of root beer ,compare to Megan i.e 3/5 gallons of root beer.

If Megan and Susan trade foods with each other , Susan will trade away pizza in exchange for root because she has comparative advantage in making pizza.

The highest price at which pizza can be traded that would make both roommates better off is 3/5 gallons of root beer because price more than that make Megan to make her own pizza rather than trading from Susan.

The lowest price that makes both roommates better off is 1/2 gallons of root beer because price less than that would made Susan to make her own root beer rather than trading wth Megan. These prices we get from their opportunity costs.