Economic Concepts - Assignment Example

Eventually, the importance of trading with each other will be realized as both parties become better off as a result of such trade. Economic Concepts 1. What is Michelle’s opportunity cost of producing potatoes? 200 potatoes = 50 chickens --> 200/200 potatoes = 50/200 chickens --> 1 potato = ? chicken or 0.25 Opportunity cost of producing one potato is ? chicken or .25. 2. What is Michelle’s opportunity cost of producing chickens? 50 chickens = 200 potatoes --> 50/50 chickens = 200/50 potatoes --> 1 chicken = 4 potatoes Opportunity cost of producing one chicken is 4 potatoes. 3. What is James’ opportunity cost of producing potatoes?

80 potatoes = 40 chickens --> 80/80 potatoes = 40/80 chickens --> 1 potato = ? chicken Opportunity cost of producing one potato is ? chicken. 4. What is James’ opportunity cost of producing chickens? 40 chickens =80 potatoes --> 40/40 chickens = 80/40 potatoes --> 1 chicken = 2 potatoes Opportunity cost of producing one chicken is 2 potatoes. 5. Which person has an absolute advantage in which activities? For Michelle: Opportunity cost of producing one potato is ? chicken. And opportunity cost of producing one chicken is 4 potatoes.

For James: Opportunity cost of producing one potato is ? chicken. And opportunity cost of producing one chicken is 2 potatoes. . This means that Michelle has the comparative advantage in producing one potato because it is cheaper for her to do this. 7. Which person has comparative advantage in chicken? For Michelle: The opportunity cost of producing one chicken is 4 potatoes. For James opportunity cost of producing one chicken is 2 potatoes. Hence, James has the lower opportunity cost for producing one chicken.

This means that James has the comparative advantage in producing one chicken because it is cheaper for him to do this. 8. 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. Yes, both Michelle and James will be better off if they specialize in the area in which they have a comparative advantage and trade at a rate of 2.5 pounds of potatoes for 1 chicken.

Michelle will specialize in producing potatoes while James will specialize in raising chickens. If Michelle will specialize in producing potatoes, she will produce 200 potatoes which when traded at a rate of 2.5 pounds for 1 chicken will produce 80 chickens (as shown below) as opposed to 50 chickens she would have produced if she specialized on raising them. 200 pounds of potatoes/ 2.5 pounds = 80 chickens. If James will specialize in raising chickens, he will produce 40 chickens which when traded at a rate of one chicken for 2.

5 pounds of potatoes will produce 100 potatoes (as shown below) as opposed to producing 80 potatoes he would have produced if he specialized on planting them. 40 chickens x 2.5 pounds of potatoes = 100 potatoes. 9. How would you extend the above narrative to businesses, society as a whole or nations?