Question

Cho and Ginny 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. Cho takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Ginny takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza.

Cho's opportunity cost of brewing a gallon of root beer is (2/3 pizza; 5/7 pizza; 1 1/2 pizzas; 1 2/5 pizzas), and Ginny's opportunity cost of brewing a gallon of root beer is (2/3 pizza; 5/7 pizza; 1 1/2 pizzas; 1 2/5 pizzas).

(Cho/ Ginny) has an absolute advantage in brewing root beer, and (Cho/ Ginny) has a comparative advantage in brewing root beer.

If Cho and Ginny trade foods with each other, (Cho/ Ginny) 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 (2/3 pizza; 5/7 pizza; 1 1/2 pizzas; 1 2/5 pizzas) of root beer, and the lowest price that makes both roommates better off is (2/3 pizza; 5/7 pizza; 1 1/2 pizzas; 1 2/5 pizzas) of root beer per pizza.

Answer 1

1) Cho takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. This indicates that the opportunity cost of brewing one gallon of root beer is 1/2/1/3 = 1.5 pizza.

Ginny takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza. This indicates that the opportunity cost of brewing one gallon of root beer is 1/5/1/7 = 1.4 pizza

Hence Cho's opportunity cost of brewing a gallon of root beer is 1 1/2 pizzas, and Ginny's opportunity cost of brewing a gallon of root beer is 1 2/5 pizzas

2) absolute advantage occurs from lower resource requirement. Comparative advantage occurs from lower opportunity cost. This indicates that Cho has an absolute advantage in the production of pizza and Ginny has comparative advantage in the production of beer.

3) if trade occurs between them, both will specialise in the production of the good in which they have comparative advantage. Accordingly Cho will be producing pizza and Ginni will be brewing beer. Therefore Cho will trade away pizza in exchange for root beer

4) the highest price at which the pizza can be treated is 5/7 pizza for one root beer and the lowest price is 2/3 Pizza for one root beer.