Application of Opportunity Costs
Donald G. Fox Sr.
Unit 1 IP
Michelle and James both, produce potatoes and chickens. Michelle can produce 200 potatoes and 50 chickens per year, and James can produce 80 potatoes and 40 chickens per year. What is Michelle's opportunity cost of producing potatoes?
If opportunity costs, is opportunity lost, then Michelle devoting 100% of her time to produce 200 potatoes her cost would be 100% loss of 50 chickens. What is Michelle's of today cost of producing chickens?
If she devotes 100% of her time to produce 50 chickens, then her cost would be 100% loss of 200 potatoes. What is James' opportunity cost of producing potatoes?
His opportunity cost for devoting 100% of his time to produce 80 potatoes is 100% loss of producing 40 chickens. What is James' opportunity cost of producing chickens?
A 100% of his time devoted to producing 40 chickens would be a cost of 80 potatoes at, 100% production loss. Which person has absolute advantage in which activities?
Michelle can produce more potatoes and chickens than James, giving her the absolute advantage. Which person has comparative advantage in potatoes?
1. For Potatoes (P)
Michelle, 200lbs. Potatoes = 50 chickens –> 200/200 P = 50/200 C –> 1P = 1/4 C
Michelle has to produce 1 chicken for 4 pounds of potatoes. 1/4 = .25 James, 80lbs. P potatoes = 40 chickens –> 80/80 P = 40/80 C –> 1P = 1/2 C
James has to produce 1 chicken for 2 pounds of potatoes. 1/2 = .5
This means that James has comparative advantage in potatoes because Michelle has to produce twice as many potatoes as James for the same amount of chickens. Which person has comparative advantage in chickens?
1. For Chickens (C)
Michelle, 50 chickens = 200lbs. potatoes –> 50/50 C = 200/50 P –> 1C = 1/4 P
Michelle has to produce 4 pounds of potatoes to produce 1 chicken. James, 40 chickens = 80lbs. potatoes –> 40/40 C = 80/40 P –> 1C = 1/2 P
James has to...
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