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 16 boxes or bake 4 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 in an hour:

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

                                                             = 0.4 cookies

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

                                                             = 2.5 boxes

LeBron could move 16 boxes or bake 4 cookies in an hour:

Opportunity cost of moving a box = (4 ÷ 16)

                                                             = 0.25 cookies

Opportunity cost of making a cookie = (16 ÷ 4)

                                                             = 4 boxes

Therefore,

Stephen has a comparative advantage in making cookies because the opportunity cost of making cookies is lower than the LeBron.

LeBron has a comparative advantage in moving boxes because the opportunity cost of moving boxes is lower than the Stephen.

Yes, the trade is possible.

Stephen should make cookies and LeBron should move boxes.