Multiple Choice
If Joe and Carla plan to specialize and trade, what should Joe produce?
2. Introductory Economic Models
PPF - Comparative Advantage and Trade
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If Joe and Carla plan to specialize and trade, what should Carla produce?
A
Only Scrambled Eggs
B
Only Fresh Squeezed
C
6 Eggs and 6 OJ
D
10 Eggs and 2 OJ Orange Juice
Verified step by step guidance1
Identify the production possibilities for both Joe and Carla by examining their respective graphs. Each graph shows the trade-off between producing Fresh Squeezed Orange Juice and Scrambled Eggs.
Determine the opportunity cost for each individual. The opportunity cost is the amount of one good that must be given up to produce more of the other good. For Joe, calculate the slope of his production possibility frontier (PPF) to find the opportunity cost of producing one more Scrambled Egg in terms of Fresh Squeezed Orange Juice, and vice versa. Do the same for Carla.
Compare the opportunity costs between Joe and Carla for each good. The person with the lower opportunity cost for a good should specialize in producing that good.
Based on the opportunity costs, decide which good Carla should specialize in. If Carla has a lower opportunity cost for producing Fresh Squeezed Orange Juice compared to Joe, she should specialize in that.
Conclude that Carla should produce the good for which she has a comparative advantage, which is determined by the lower opportunity cost. This will maximize the total output when Joe and Carla trade with each other.
Related Practice
PPF - Comparative Advantage and Trade practice set
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