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Microeconomics: Econ220 - 1302b

In: Business and Management

Submitted By archgalva
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AIU Online
Microeconomics: ECON220-1302B-03
June 15, 2013

| Potatoes | Chickens | Michelle | 200 | 50 | James | 80 | 40 |

* What is Michelle’s opportunity cost of producing potatoes?
= 50 chickens / 200 lbs. of potatoes
= ¼ chicken per pound of potatoes
Michelle’s O.C. for producing potatoes is one quarter. * What is Michelle’s opportunity cost of raising chickens?
= 200 / 50 = four lbs. of potatoes per chicken
Michelle’s O.C. to raise chickens is four pounds of potatoes per chicken. * What is James’ opportunity cost of producing potatoes?
= 40 chicken / 80 lbs. of potatoes
= ½ chicken per pound of potatoes James’ O.C. to produce potatoes is half. * What is James’ opportunity cost of raising chickens?
= 80 / 40 = two pounds of potatoes per chicken
James’ O.C. to raise chickens is two pounds of potatoes per chicken
The formula I used to calculate opportunity cost is: B (how much is given up) / A (how much you get) (Krugman & Wells, 2009). * Which person has an absolute advantage in which activities?
Someone can produce more per unit of time will always be given absolute advantage in that given activity. Michelle’s has the absolute advantage in both potatoes and chickens simply because her opportunity cost of raising chickens is four lbs. of potatoes per chicken. James’ O.C. of chickens is two pounds of potatoes per chicken. * Which person has comparative advantage in potatoes?
Michelle has the comparative advantage in potatoes since her O.C. is lower than James. Michelle=1/4 & James=1/2. * Which person has comparative advantage in chickens?
James has the C.A. in chickens since his O.C. is lower than Michelle’s. (2<4). * Suppose they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for…...

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