Suppose that two people, Michelle and James each live alone in an isolated region

Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens.  If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds of potatoes per year. If she devotes all her resources to raising chickens, she can raise 50 chickens per year. (If she apportions some resources to each, then she can produce any linear combination of chickens and
potatoes that lies between those extreme points.  If James devotes all his resources to growing potatoes, he can raise 80 pounds of potatoes per year. If he devotes all his resources to raising chickens, he can raise 40 chickens per year. (If he apportions some resources to each, then he can produce any linear combination of chickens and potatoes that lies between those extreme
points.)

Potatoes

Chickens

Michelle

200

50

James

80

40

What is Michelle’sopportunity cost of producing potatoes?
What is Michelle’sopportunity cost of producing chickens?
What is James’ opportunity cost of producing potatoes?
What is James’ opportunitycost of producing chickens?
Which person has anabsolute advantage in which activities?
Which personhas comparative advantage in potatoes?
Which personhas comparative advantage in chicken?
Suppose that they arethinking of each specializing completely in the area in which they have acomparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain.
How would you extend theabove narrative to businesses, society as a whole or nations? Explain.

 

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