Question

Consider two agents, Alice and Bob, who are each capable of producing two goods cornbread and bowls of chili. Alice and Bob have constant opportunity cost technology for producing these two goods. The table below the maximum they can produce of the two goods if they devote themselves to only producing that good. The format of this table is similar to what we did in class. Cornbread Chili Alice 20 15 Bob 6 3 In other words, if Bob devoted himself to only producing chili, he could produce 3 bowls, but if he devoted himself to only producing cornbread, he could produce 6 pans. Questions 1. Calculate the opportunity costs of both Cornbread and Chili for both Alice and Bob. 2. Who has the comparative advantage in the production of Cornbread? Chili? Please be clear about why you say they have a comparative advantage. Calculations are more than appropriate. 3. Before Bob and Alice met they had their own personal production and consumption plans. They made what they ate and only ate what they made. Their consumption of cornbread and chili was: Cornbread Chili Alice 12 6 Bob 2 2 Now that they know each other, and they know that they both like chili and corn bread, and can produce both, they are curious if it is possible for them to specialize in the production of either chili or cornbread, and if it is possible for them to have more of these two goods. Propose a production plan that results in at least as much as they had before and more of at least one good. 4. Propose a consumption plan that makes both Alice and Bob at least as well off as before the specialized and engaged in trade.

Answer 1

1) Opportunity cost of cornbread -

Alice : 15/20 = 0.75

Bob : 3/6 = 0.5

Opportunity cost of chili -

Alice :20/15 = 1.33

Bob : 6/3 = 2

2) A person have comparative advantage in production of one good in which it has lesser opportunity cost.

As you can see the above opportunity costs, Alice has comparative advantage in chili and Bob has comparative advantage in cornbread.

3) If both starts producing that good in which they each specialize and then trade from each other, then they will have units of both good more than before.

That is Alice produces 15 units of chili and Bob produces 6 units of cornbread.