Question

Neha and Teresa 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. Neha takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Teresa takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza.
Neha's opportunity cost of making a pizza is _____ of root beer, and Teresa'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 Neha and Teresa 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:

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

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

If Neha and Teresa trade foods with each other, Neha 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:

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

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

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

Teresa'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, Neha 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.