Question

Janet and Megan are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Janet takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Megan takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza.
Janet's opportunity cost of making a pizza is ______ of root beer, and Megan's opportunity cost of making a pizza is _______ of root beer.
______ has an absolute advantage in making pizza, and _______ has a comparative advantage in making pizza.
If Janet and Megan trade foods with each other, ______ will trade away pizza in exchange for root beer. The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is ______ of root beer, and the lowest price that makes both roommates better off is ______ of root beer per pizza.

Answer 1

Answer:

Janet's opportunity cost of making a pizza is 0.67 gallons of root beer, and Megan's opportunity cost of making a pizza is 0.71 gallons of root beer.

Janet has an absolute advantage in making pizza, and Janet has a comparative advantage in making pizza.

If Janet and Megan trade foods with each other, Janet will trade away pizza in exchange for root beer. The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is 0.71 gallons of root beer, and the lowest price that makes both roommates better off is 0.67 gallons of root beer per pizza.

Explanation:

Janet's opportunity cost to brew a gallon of root beer = 3/2 = 1.5 pizzas

Janet's opportunity cost to make a pizza = 2/3 = 0.67 gallons of root beer

Megan's opportunity cost to brew a gallon of root beer = 7/5 = 1.4 pizzas

Megan's opportunity cost to make a pizza = 5/7 = 0.71 gallons of root beer

Opportunity costs are extra costs or benefits lost that result from choosing one activity or investment over another alternative. E.g. in this case, Janet can either make 1.5 pizzas or 1 gallon of root beer during a 3 hour period, but she cannot make both of the together. She must choose one or the other.