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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

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.

Subpart (a):

To determine

Absolute and comparative advantage.

Explanation

Opportunity cost of making pizza for Pat is calculated as follows:

Opportunity cost of a pizzaPat =Time taken in making a pizzaTime taken to brew a gallon of beer=24=0.5 gallons of root beer

Thus, the opportunity cost of making pizza for pat is 0.5 gallons of root beer

Subpart (b):

To determine

Comparative advantage and specialization.

Subpart (c):

To determine

Comparative advantage, specialization and price.

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