What is Michelle’s opportunity cost of produ...

Suppose that two people, Michelle and James each live alone in an isolated
region. They each have the same resources available, and they grow potatoes and
raise chickens.  If Michelle devotes all her resources to growing potatoes, she
can raise 200 pounds of potatoes per year. If she devotes all her resources to
raising chickens, she can raise 50 chickens per year. (If she apportions some
resources to each, then she can produce any linear combination of chickens and
potatoes that lies between those extreme points.  If James devotes all his
resources to growing potatoes, he can raise 80 pounds of potatoes per year. If
he devotes all his resources to raising chickens, he can raise 40 chickens per
year. (If he apportions some resources to each, then he can produce any linear
combination of chickens and potatoes that lies between those extreme
points.)

Potatoes

Chickens

Michelle

200

50

James

80

40

  • What is Michelle’s
    opportunity cost of producing potatoes?
  • What is Michelle’s
    opportunity cost of producing chickens?
  • What is James’ opportunity
    cost of producing potatoes?
  • What is James’ opportunity
    cost of producing chickens?
  • Which person has an
    absolute advantage in which activities?
  • Which person
    has comparative advantage in potatoes?
  • Which person
    has comparative advantage in chicken?
  • Suppose that they are
    thinking of each specializing completely in the area in which they have a
    comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for
    1 chicken, would they each be better off? Explain.
  • How would you extend the
    above narrative to businesses, society as a whole or nations? Explain.

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