Question

Susan can pick 4 pounds of coffee in an hour or gather 2 pounds of nuts. tom can pick 2 pounds of coffee in an hour or gather 4 pounds of nuts. each works 6 hours per day. assume that tom and susan specialize according to their comparative advantage to produce coffee and nuts.
a. suppose that susan and tom could buy or sell coffee and nuts in the world market at a price of $2 per pound for coffee and $2 per pound for nuts. if each person specialized completely in the good for which he or she had a comparative advantage, how much could they earn by selling all they produce (tom's earnings plus susan's earnings)?

Answer 1

Answer: Total earning is $96 for both Susan and Tom

Explanation:

Susan can pick 4 pounds of coffee or 2 pounds of nuts.

Tom can pick 2 pounds of coffee or 4 pounds of nuts.

Price of Coffee = $2 per pound

Price of Nuts = $2 per pound

Opportunity cost of producing coffee for Susan = 2/4 = 0.5

Opportunity cost of producing coffee for Tom = 4/2 = 2

Opportunity cost of coffee is low for Susan, so she has a comparative advantage in it.

So, Susan produces 6*4 = 24 pounds of coffee, total revenue from sale of coffee is $24*2 = $48

Opportunity cost of producing Nuts for Susan = 4/2 = 2

Opportunity cost of producing Nuts for Tom = 2/4 = 0.5

Opportunity cost of coffee is low for Tom, so he has a comparative advantage in it.

So, Tom produces 6*4 = 24 pounds of nuts, total revenue from sale of nuts is $24*2 = $48

So, $total earning = 48+ 48 = 96$