Question

Priti and Dan each produce strong cocktails and yummy cookies. Priti takes less time than Dan to mix up a cocktail and to bake a batch of cookies. Thus, Priti would rather produce on her own because she cannot gain from trade with Dan. True or False with explanation.

Answer 1

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False.

(Here Priti has absolute advantage in both cocktails and cookies. But from Ricardo's comparative advantage theory we know that they can work together even in this circumstance. According to the theory, Priti and Dan should make the product which has lesser opportunity cost. If Priti can make 10 cocktails or 12 cookie in an hour, while Dan can make 8 cocktails or 4cookie in an hour, then Priti should specialise in cookies while Dan should specialise in cocktails as per the lower opportunity cost.

Say Priti goes ahead and makes 12 cookies then goes to Dan for a deal. Now for Dan every cookie is worth 2 cocktails (i.e 8cookies/4cocktails). To earn from the trade Dani quotes a lesser value of around 1.5 cocktails per cookie. Priti agrees and now gets 18 cocktails which is greater than the 10 she would have produced alone in an hour, whereas Dan gets cookies at a cheaper cost than he could have produced himself.)