Question

Pat and Kris 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. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.

a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?
c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.

Answer 1

Answer: The opportunity cost of an item is what you give up to get that item. In this case, Pat's opportunity cost of making a pizza is the amount of root beer she gives up brewing. Making a pizza takes her 2 hours; if instead she spent her time producing root beer, she would produce 2 gal * (1 gal rb/ 4 hrs)=1/2 gallon . Similar calculations yield an opportunity cost of 2/3 gallons of root beer for one pizza for Kris.

Pat Correct has an absolute advantage in making pizza, and Pat Correct has a comparative advantage in making pizza