Question

Suppose we have a 2-person world, with only Stephen and his friend LeBron. Suppose that Stephen can move 70 boxes or bake 28 cookies in an hour. Suppose that LeBron could move 24 boxes or bake 6 cookies in an hour. Is trade possible?
a. No, trade isn’t possible, because LeBron has an absolute advantage in both making cookies and moving boxes.
b. Yes, trade is possible. Stephen should move boxes while LeBron makes cookies, because Stephen has a comparative advantage in moving boxes, whereas LeBron has a comparative advantage in making cookies.
c. Yes, trade is possible. Stephen should make cookies while LeBron moves boxes, because Stephen has a comparative advantage in making cookies and LeBron has a comparative advantage in moving boxes.
d. No, trade isn’t possible, because Stephen has an absolute advantage in both making cookies and moving boxes.

Answer 1

Answer:

Option (c) is correct.

Explanation:

Stephen can move 70 boxes or bake 28 cookies:

Opportunity cost of moving a box = (28 ÷ 70)

                                                         = 0.4 cookies

Opportunity cost of baking a cookie = (70 ÷ 28)

                                                         = 2.5 boxes

LeBron could move 24 boxes or bake 6 cookies:

Opportunity cost of moving a box = (6 ÷ 24)

                                                         = 0.25 cookies

Opportunity cost of baking a cookie = (24 ÷ 6)

                                                             = 4 boxes

Yes, trade is possible.

Stephen has a comparative advantage in baking cookies because of the lower opportunity cost than LeBron, so he is specialized in baking cookies.

On the other hand, LeBron has a comparative advantage in moving boxes because of the lower opportunity cost than Stephen, so he is specialized in moving boxes.