4. Your roommate Pat decides to help with the party. The amounts of brownies and cake which...
Question:
4. Your roommate Pat decides to help with the party. The amounts of brownies and cake which can be produced in an hour (if all resources are devoted to that good) are shown by the following table:
YOU PAT
BROWNIES PER HOUR 8 2
CAKE PER HOUR 2 1
a. Who has an absolute advantage in producing brownies? Cake?
b. For you, what is the opportunity cost of one brownie? Of one cake?
c. For Pat, what is the opportunity cost of one brownie? Of one cake?
d. Should you and Pat specialize? Who should produce what?
e. Suppose that you have so many guests that you have to split up the party into two rooms. You throw one party and Pat throws the other. What are the terms of trade? (At what rate would you each be willing to trade?)
f. Using graphs for both you and Pat, show that trade allows each of you to
achieve a point on your consumption possibilities curve which is greater than
your production possibilities curve. Be sure to label all curves and axes.
g. What is this principle called?