Production Opportunities - Assignment Example

What is James’ opportunity cost of producing chickens?  A) Since James can only produce half the amount of chickens compared to potatoes, his opportunity cost of producing chickens is 2 potatoes per chicken.Which person has an absolute advantage in which activities?  A) Michelle has an absolute advantage in both the production of chickens and potatoes as she produces more than James.Which person has comparative advantage in potatoes?  A) Michelle has a comparative advantage in producing potatoes as she has a lower opportunity cost when compared to James.

Which person has comparative advantage in chickens?  A) James has a comparative advantage in producing chickens because he has a lower opportunity cost when compared with Michelle.Suppose that 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 1 chicken, would they each be better off? Explain. A) Yes, they would both be better off at specializing and then trading with each other.

Michelle has a comparative advantage in potatoes, if Michelle focused completely on producing potatoes, she could produce 200. Because Michelle is producing potatoes, James has the only option of producing chickens. If James focused solely on producing chickens, he could produce 40. At the trading rate of 2.5 pounds of potatoes for 1 chicken, Michelle would lose 50 pounds of potatoes and gain 20 chickens (200 potatoes would become 150 potatoes and 20 chickens). On the other hand, James would lose 20 chickens and gain 50 potatoes (40 chickens would become 20 chickens and 50 potatoes).

Thus, they would both be reaching their maximum production potential and both will gain something out of a trade.