Aliya and Jason have linear PPFs over the production of computers and balloons. If Aliya devotes...

Aliya and Jason have linear PPFs over the production of computers and balloons. If Aliya devotes all her resources to computers, she can produce 15 units. If she devotes all her resources to balloons, she can produce 15 units. If Jason devotes all his resources to computers, he can produce 10 units. If he devotes all his resources to balloons, he can produce 5 units. What is 3 each person’s opportunity cost of computers and balloons? What pattern of trade will they engage in

Expert Solution

For Aliya,

Opportunity cost of producing computers = 15/15 = 1 unit of balloon

Opportunity cost of producing balloons = 15/15 = 1 unit of computer

==

For Jason,

Opportunity cost of producing computers = 5/10 = .5 unit of balloon

Opportunity cost of producing balloons = 10/5 = 2 units of computers

On the basis of above opportunity costs, Aliya has comparative advantage in producing ballons as she has lower opportunity cost to produce ballon. In contrast to it, Jason has comparative advantage in producing computers as he has lower opportunity cost in producing computers.

So, Aliya will specialize and produce balloons and sell it to Jason. While, Jason will specialize and produce computers and sell it to Aliya as required. The trade term will range between 1 computer for .5 balloon to 1 computer for 1 ballon.

Rahul Sunny answered 2 years ago

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