Question

Amy can produce either 5,000 pounds of cheese or 20 houses per year. Jim can produce either 5,000 pounds of cheese or 10 houses per year. Amy has a comparative advantage in the production of ________, and Jim has a comparative advantage in the production of ________.

Answer 1

The answers are:

1. houses
2. no comparative advantage

Step-by-step explanation:

Comparative advantage refers to the ability to produce a good or service at a lower opportunity cost than someone else.

In this case, Amy can produce 20 houses per year while Jim can only produce 10 houses, so clearly Amy has a comparative advantage in the productions of houses (she can produce twice as much).

But both Amy and Jim can produce 5,000 pounds of cheese per year, so none of them has a comparative advantage in the production of cheese.

Answer 2

Amy has a comparative advantage in the production of houses

Jim has a comparative advantage in the production of cheese

Step-by-step explanation:

The concepts of comparative advantage and opportunity cost are central to answering this question. A person has a comparative advantage over another person if they can perform an economic activity more efficiently than the other person or at a lower opportunity cost. An opportunity cost is the foregone benefit as a result of pursuing one alternative over the other.

If Amy chooses to produce only cheese, she would give up building and selling 20 houses. Amy's opportunity cost of producing one pound of cheese is 0.004 units of a house whereas the opportunity cost of producing one house is 250 pounds of cheese.

If Jim chooses to produce only cheese, he would give up building and selling 10 houses. Jim's opportunity cost of producing one pound of cheese is 0.002 units of a house whereas the opportunity cost of producing one house is 500 pounds of cheese.

Given that Amy has a higher opportunity cost in producing houses and Jim has a higher opportunity cost in producing cheese, it can be inferred that: Amy has a comparative advantage in producing houses since her opportunity cost is lower and Jim has a comparative advantage in producing cheese since his opportunity cost is lower.