Question

Devon’s total production of milk	Devon’s total productio­­­­­n of ice cream	Ravi’s total production of milk	Ravi’s total production of ice cream
Devote all time to producing Milk	80 pints of milk	0 pints of ice cream	175 pints of milk	0 pints of ice cream
Devote all time to producing ice cream	0 pints of milk	20 pints of ice cream	0 pints of milk	25 pints of ice cream

Note: Assume that both Devon and Ravi can produce any corresponding linear combination of milk and ice cream.

Consider Devon’s production of milk and ice cream

1. What is Devon’s opportunity cost of producing a pint of ice cream?
2. What is Devon’s opportunity cost of producing a pint of milk?
3. What is Ravi’ opportunity cost of producing a pint of ice cream?
4. What is Ravi’ opportunity cost of producing a pint of milk?
5. Who has the absolute advantage in the production of milk?
6. Who has the absolute advantage in the production of ice cream?
7. Who has the comparative advantage in the production of milk?
8. Who has the comparative advantage in the production of ice cream? (Please provide a brief explanation.)
9. If both want to consume a strictly positive amount of both milk and ice cream: Who will trade milk for ice cream? (i.e. Who will give up milk in exchange for ice cream?)
10. If both want to consume a strictly positive amount of both milk and ice cream: Who will trade ice cream for milk? (i.e. Who will give up ice cream in exchange for milk?)
11. How much milk and ice cream will be produced if both Ravi and Devon completely specialize in the production of the product in which he has a comparative advantage?

Answer 1

  

1	What is Devon’s opportunity cost of producing a pint of ice cream? 4 pints of milk 80 pints of milk/ 20 pints of ice cream = 4 pints of milk
2.	What is Devon’s opportunity cost of producing a pint of milk? 0.25 pints of ice cream 20 pints of ice cream / 80 pints of ice cream = 0.25 pints of ice cream.
3.	What is Ravi’ opportunity cost of producing a pint of ice cream? 7 pints of milk 175 pints of milk/ 25 pints of ice cream = 7 pints of milk
4.	What is Ravi’ opportunity cost of producing a pint of milk? 0.14 pints of ice cream 25 pints of ice cream / 175 pints of milk = 0.14 pints of ice cream
5.	Who has the absolute advantage in the production of milk? Ravi Ravi can produce 175 pints of milk against Davon's 80 pints.
6.	Who has the absolute advantage in the production of ice cream? Ravi Ravi can produce 25 pintsof ice cream against Davon's 20 pints
7.	Who has the comparative advantage in the production of milk? Ravi Ravi's opportunity cost of milk is lower (0.14) than Davon's (0.25)
8.	Who has the comparative advantage in the production of ice cream? Davon Davon has a lower opportunity cost in producing ice cream (4 pints of milk) compared to Ravi (7 pints of ice cream).
9.	If both want to consume a strictly positive amount of both milk and ice cream: Who will trade milk for ice cream? Devon Devon will specialize in ice cream and give up producing milk. Devon will produce only ice cream.
10.	If both want to consume a strictly positive amount of both milk and ice cream: Who will trade ice cream for milk? Ravi Ravi will specialize in milk production and give up ice cream production.
11.	How much milk and ice cream will be produced if both Ravi and Devon completely specialize in the production of the product in which he has a comparative advantage? Devon will produce 20 pints of ice cream and 0 milk. Ravi will produce 0 ice cream and 175 pints of ice milk.