   Chapter 2, Problem 9WNG

Chapter
Section
Textbook Problem

Using the data in problem 8, prove that both Tina and David can be made better off through specialization and trade.

To determine

Explain who has the comparative advantage in the production of good Y and good X.

Explanation

Table 1 shows Ms. T’s possible combination of good X and good Y as follows:

Table 1

 Combination Good X Good Y 1 100 0 2 50 25 3 0 50

Table 1 revels when a person is moving from a combination of one point to other point, where he will give up 50 units of X to gain 25 units of Y.  In other words, the person is giving up 25 units of Y to gain 50units of X.

Table 2 shows Mr. D’s possible combination of good X and good Y as follows:

Table 2

 Combination Good X Good Y 1 50 0 2 25 40 3 0 80

Table 2 revels when a person is moving from a combination of one point to other point, where he will give up 25 units of X to gain 40 units Y.  In other words, the person is giving 40 units of Y to gain 25 units of X.

The opportunity cost of producing good X and good Y for both T and D is calculated as follows:

The general formula for calculating the opportunity cost is given as follows:

Opportunity Cost=Given up outputGained output (1)

Substitute the respective values in Equation (1) to calculate the opportunity cost of producing good Y for Ms. T.

Opportunity CostGood Y=5025=2

The opportunity cost of producing good Y for Ms. T is 2X.

Using the same Equation (1), the calculation of opportunity cost of producing good X for Ms. T is shown below:

Opportunity CostGood X=2550=0

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