Question

Answer all questions in full sentences for full credit.

Mikey and Dom are roommates. They spend most of their time studying, but they leave some time for their favorite activities: making pizza and brewing root beer. Dom takes 1 hour to brew 4 gallons of root beer or 1 hour to make 2 pizzas. Mikey takes 1 hour to brew 6 gallons of root beer or 1 hour to make 4 pizzas.

1. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?

2. If Dom and Mikey trade with each other, who will trade away pizza in exchange for root beer?

View keyboard shortcuts

EditInsertFormatToolsTable

12pt

Paragraph

Answer 1

(I)

Opportunity cost (OC) is as follows.

Mikey's OC of pizza = 6/4 = 1.5 root beer

Dom's OC of pizza = 4/2 = 2 root beer

(II)

Since Mikey can make more pizza per hour than Dom can (4 > 2), Mikey has absolute advantage in pizza.

Since Mikey can make more root beer per hour than Dom can (6 > 4), Mikey has absolute advantage in root beer.

(III)

Since Mikey can make pizza at lower OC thna Dom can (1.5 < 2), Mikey has comparative advantage in pizza.

Accordingly, Dom has comparative advantage in root beer.

(IV)

As per law of comparative advantage, Mikey will specialize in and sell (trade away) pizza.