Question

Consider two persons, Sam and Alex. Suppose in a 24-hour period, Sam can make either 25...

Consider two persons, Sam and Alex. Suppose in a 24-hour period, Sam can make either 25 bookmarks or 12 pairs of slippers, while Alex can make either 15 bookmarks or 40 pairs of slippers. If they were to specialise and trade, what would be the maximum relative price Sam would pay Alex (i.e. the maximum number of goods Sam produced that he is willing to offer to Alex in exchange for 1 unit of the goods Alex produced)?

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Answer #1

Opportunity cost of 1 bookmark for Sam = slippers given up/Bookmarks produced = 12/25 = 0.48 slippers
Opportunity cost of 1 bookmark for Alex = slippers given up/Bookmarks produced = 40/15 = 2.67 slippers
Opportunity cost of 1 slipper for Sam = bookmarks given up/slippers produced = 25/12 = 2.08 bookmarks
Opportunity cost of 1 slipper for Alex = bookmarks given up/slippers produced = 15/40 = 0.375 bookmarks

Thus, Alex will produce slippers because it has comparative advantage in slippers because of lower opportunity cost. So, Alex specializes in slippers.
The maximum price Sam is willing to offer to Alex in exchange for 1 unit of slippers is 2.08 bookmarks.

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