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Opportunity costs of producing caps compared to jackets?
In an hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps or 4 jackets.
a) Calculate Sue's opportunity cost of producing a cap.
b) Calculate Tessa's opportunity cost of producing a cap.
c) Who has a comparative advantage in producing caps?
d) If Sue and Tessa specialize in producing the good in which each of them has a comparative advantage, and they trade 1 jacket for 15 caps, who gains from the specialization and trade?
Please explain for parts c) and d).
1 Answer
- John MLv 71 decade agoFavorite Answer
a. She makes 10 caps for every jacket, so a cap costs 1/10th of a jacket
b She makes 20 caps for every jacket, so a cap costs 1/20th of a jacket
c Tessa can make caps for less than Sue can per cap
d Tessa makes 20 caps instead of one jacket, but trades only 15 to Sue for a jacket. Tessa keeps 5 caps and gets a Jacket so she is better off by 5 caps. Sue gets 15 caps and only pays one Jacket, which takes her 10 caps to make, so Sue is also ahead by 5 caps. They both benefit from specialization and trade.
