Question

Consider the following scenario.

Adam and Barb can switch between producing computers and producing smartphones. Adam uses 8 hours to produce 1 computer and 2 hours to produce 1 smartphone. Barb uses 1.5 hours to produce 1 computer and 2 hours to produce 1 smartphone. In 24 hours, Adam can produce 3 computer and 12 smartphones, and Barb can produce 16 computers and 12 smartphones. If they decided to trade with one another, at which of the following prices would both Adam and Barb gain from trade? Justify your answer

a. 30 computers for 15 smartphones

b. 30 computers for 18 smartphones

c. 30 computers for 24 smartphones

Answer 1

Adma's opportunity cost for producing computer= 12/3 = 4 smartphones.

Barb's opportunity cost for producing smartphones = 12/16= 0.75 smartphones

If they decided to trade then , the price should lie between 0.75 smartphone per computer and 4 smartphones per computer.

Here , trade price of 30 computer for 24 smartphones means 0.8 smartphones per computer which lies between the above range. Therefore, this price would make both Adam and Barb gain from trade. Hence, option(C) is correct.