Question

2. Suppose both Emma and Hakim have small bakeries. They both produce bread and

pastries. Below are each of their daily production numbers.

Emma’s Bakery

Bakery Hakim

Bread (doz./day)

Pastries (doz./day)

Bread (doz./day)

Pastries (doz./day)

0

30

0

45

2

24

4

36

4

18

8

27

6

12

12

18

8

6

16

9

10

0

20

0

a)

Who has a comparative advantage in producing bread? And who has a

comparative advantage in producing pastries?

b)

Suppose Emma is currently producing and the market is consuming 2 doz. loaves

of bread and 24 doz. pastries and Hakim is currently producing and the market is

consuming 12 doz. loaves of bread and 18 doz. pastries. If either or both have a

comparative advantage in one product or the other, demonstrate how specializing

in what they have a comparative advantage of will make both better off if they

engage in trad

+

69                                                                             

Answer 1

Emma's Bakery		Bakery Hakim
Bread(doz/pay)	Pastries(doz/day)	Bread(doz/pay)	Pastries(doz/day)
0	30	0	45
2	24	4	36
4	18	8	27
6	12	12	18
8	6	16	9
10	0	20	0

If they produce only Bread or, Pastry their output will be

	Emma's Bakery	Bakery Hakim
Bread (doz/day)	10	20
Pastries(doz/day)	30	45

Now we have to determine the opportunity cost

Opportunity Cost

	Emma's Bakery	Bakery Hakim
1 unit of Bread	3 unit of Pastry	2.25 unit of Pastry
1 unit of Pastries	0.33 unit of Bread	0.44 unit of Bread

	1 unit of bread	1 unit of pastry
Emma's Bakery	3 unit of pastry	0.33 unit of bread
Bakery Hakim	2.25 unit of pastry	0.44 unit of bread

Opportunity cost of producing Bread is low for Bakery Hakim while opportunity cost of producing Pastry is low for Emma's Bakery.

A. Bakery Hakim has comparative advantage in producing Bread.

    Emma Bakery has comparative advantage in producing Pastry.

B.

	Emma Bakery		Bakery Hakim
	Bread	Pastry	Bread	Pastry
Before Specialization
Consumption	2	24	12	18
After Specialization
Production	0	30	20	0
Trade Action	4	-10	-4	10
Consumption	4	20	16	10

They will agree for any trade that is greater than 2.25 units of pastry or, less than 3 units of pastry for per unit of bread.

Let us assume they agreed to trade at 1 unit of bread = 2.5 units of pastry. From the given information we can construct the following trade. Please my humble request contact if having any query i will be obliged to you for your generous support. Thank You.