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 Egg
B
Only Fresh Squeezed Orange juice
C
6 Eggs and 6 OJ
D
10 Eggs and 2 OJ
Verified step by step guidance1
Identify the production possibilities for both Joe and Carla from the graphs. Joe can produce a maximum of 4 units of Fresh Squeezed Orange Juice or 4 units of Scrambled Eggs. Carla can produce a maximum of 4 units of Fresh Squeezed Orange Juice or 2 units of Scrambled Eggs.
Calculate the opportunity cost for Joe. For Joe, the opportunity cost of producing 1 unit of Scrambled Eggs is 1 unit of Fresh Squeezed Orange Juice, and vice versa.
Calculate the opportunity cost for Carla. For Carla, the opportunity cost of producing 1 unit of Scrambled Eggs is 2 units of Fresh Squeezed Orange Juice, and the opportunity cost of producing 1 unit of Fresh Squeezed Orange Juice is 0.5 units of Scrambled Eggs.
Determine who has the comparative advantage in producing each good. Joe has a lower opportunity cost for producing Scrambled Eggs (1:1) compared to Carla (1:2), while Carla has a lower opportunity cost for producing Fresh Squeezed Orange Juice (1:0.5) compared to Joe (1:1).
Based on comparative advantage, Carla should specialize in producing Fresh Squeezed Orange Juice, and Joe should specialize in producing Scrambled Eggs. This specialization allows them to trade and both benefit from increased total production.
Related Practice
PPF - Comparative Advantage and Trade practice set
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