Question

1. Walter has reached a crossroads in his life. He is trying to decide whether to change careers. Currently, Walter teaches chemistry but is considering entering a more lucrative line of work selling homemade pharmaceuticals. Walter can either teach 4 classes very well or produce 12 grams of his new drugs in a day. Interestingly, Walter’s friend Jesse is in a similar predicament. Jesse can teach 3 classes very well or produce 2 grams of drugs during a day.

Walter’s opportunity cost of teaching one class: ___________________________

(Yes, you can have fractional grams of drugs):

Jesse’s opportunity cost of teaching one class: ___________________________

(Yes, you can have fractional grams of drugs):

Walter’s opportunity cost of making one gram of his drug: ___________________________

(Yes, you can have fractional numbers of classes):

Jesse’s opportunity cost of making one gram of his drug: ___________________________

(Yes, you can have fractional numbers of classes):

Who has an absolute advantage in teaching classes? ________________________

Who has the comparative advantage in teaching classes? _____________________

Who has the comparative advantage in making drugs? _____________________

Answer 1

Whenever an option is chosen from alternatives, something is given up. Choices involve trading off the benefits of one opportunity against the benefits of its best alternative. The opportunity cost of deciding for an option is the value of the best alternative being given up.

Absolute advantage is about producing goods or services more efficiently with fewer resources or in less time with same resources.

Comparative advantage is about lowering the opportunity cost of the missed alternatives.

Comparative advantage

Walter can either teach 4 classes very well or produce 12 grams of his new drugs in a day.

Walter's opportunity cost of teaching one class is that he has to forgo producing 12 / 4 = 3 grams of new drug.

Walter's opportunity cost of teaching one class: 3 grams of new drug.

Jesse can teach 3 classes very well or produce 2 grams of drugs during a day.

Jesse's opportunity cost of teaching one class is that she has to forgo producing 2 / 3 = 0.67 grams of new drug.

Jesse's opportunity cost of teaching one class: 0.67 grams of new drug.

Walter’s opportunity cost of making 1 gram of his drug is that he has to forgo 4 / 12 = 0.33 classes.

Walter’s opportunity cost of making 1 gram of his drug: 0.33 classes.

Jesse’s opportunity cost of making 1 gram of her drug is that she has to forgo 3 / 2 = 1.5 classes.

Jesse's opportunity cost of making 1 gram of her drug: 1.5 classes.

Walter has an absolute advantage in teaching classes. He can teach 4 classes very well during the day while Jesse can teach only 3. Thus, Walter requires less of a labor hours per class.

Jesse has the comparative advantage in teaching classes. Jesse's opportunity cost of taking class in terms of grams of new drug (0.67 grams) is lower than Walter's opportunity cost of taking class in terms of grams of new drug (3 grams)

Walter has the comparative advantage in making drug. Walter's opportunity cost making drug in terms of taking classes (0.33 classes) is lower than Jesse's opportunity cost of making drug in terms of taking classes (1.5 classes).