Sample comparative advantage problems:

Try to complete the questions below.  The answers are listed at the end.


Suppose Shakira can produce either 5 units of good X or 15 units of good Y in one day while Mariah can produce either 2 units of X or 10 units of Y in one day.

a.   If no specialization is possible, what is the opportunity cost to Shakira of one unit of good X?  Of one unit of good Y?

 

 

 

b.   If specialization is possible, in which good should Shakira specialize?  In which should Mariah specialize?  Explain.

 

 

 

 

 

c.   At what sort of ratio will Shakira and Mariah trade good X for good Y?   Explain how such a ratio could benefit both.

 

 

 

 

 

 

 

 

 

Answers:

a.   Shakira can produce either 5 units of X or 15 units of Y in a day.  In the time it takes her to produce an X she could have produced three times as many units of Y.  Therefore, the opportunity cost of one X = 3Y, and the opportunity cost of one Y = (1/3)X.

b.   Shakira should specialize in X and Mariah in Y.  Shakira can produce more than twice the amount X as Mariah (5 vs. 2), but only 50% more Y (15 vs. 10).  Alternatively, the opportunity cost of good X for Shakira is lower than for Mariah (3Y vs. 5Y) and the opportunity cost of Y for Mariah is lower than for Shakira (1/5 vs. 1/3 of an X).

c.   Any ratio between 1:3 and 1:5 works.  For example, at 1X = 4Y, Shakira can get 4Y per X through trade while she could get only 3Y per X by himself.  Mariah could get an X for 4Y through trade, but must sacrifice 5Y for an X by herself.