Question

Homer and Marge each produce donuts and beer with six labor hours a day each. The maximum values each can produce of each good are given in the following table:

	Beer	Donuts
Homer	20	10
Marge	30	20

In the past, the two have not traded. If the two do decide to trade, each fully specializing in the good where he/she has comparative advantage, with trade the amount available for consumption between both of them will be ________ donuts and _________ pints of beer.

Answer 1

Homer can produce either 20 pints of beer or 10 donuts. His opportunity cost of producing 1 pint of beer is (10/20) = 0.5 donut and OC of producing 1 donut is (20/10) = 2 pints of beer.

Marge's OC of producing 1 pint of beer is (20/30) = 0.67 donut and OC of producing 1 donut is (30/20) = 1.5 pints of beer.

As Homer's OC of producing 1 pint of beer is less than that of Marge's, so Homer has comparative advantage in the production of beer. And, Marge has CA in production of donut.

So if they specialize in the production in which they have comparative advantage, then Homer will produce 20 pints of beer and 0 donut. And, Marge will produce 20 donuts and 0 beer.

Therefore, with trade, the amount available for Consumption between both of them will be 20 donuts and 20 pints of beer.