Pat and Kris are roommates. They spend most of their time studying (of course),
ID: 1248993 • Letter: P
Question
Pat and Kris are roommates. They spend most of their time studying (of course), but some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.a. What is each roomate's opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?
c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roomates better off? What is the lowest price? Explain
Explanation / Answer
Time:
Name ...Beer ...Pizza
Pat....... 4........... 2
Kris...... 6........... 4
a)
Opportunity cost:
Pat : 1 pizza = 1/2 beer (= 2/4) ? 0.50
Kris: 1 pizza = 2/3 beer (= 4/6) ? 0.67
Pat has absolute advantage in making pizza (it takes only 2 hours, thus minimum)
Pat has comparative advantage in making pizza (he sacrifices comparatively less beer-time to make pizza)
b)
Pat will produce and trade pizza.
c)
Highest price Pat will be willing to exchange is 2 pizzas for one beer or one pizza for 0.5 beer (at this point he will become indifferent for exchange) - he will not agree to trade more than 2 pizzas for one beer.
Lowest price Kris will wish to exchange is 1 beer for 1.5 pizzas (at this point he will become indifferent for exchange).
Thus:
Pat will sell one pizza for not less than 0.5 beer.
Kris will purchase one pizza for not more than 0.67 beer.
Pat will purchase one beer for not more than 2 pizzas.
Kris will sell one beer for not less than 1.5 pizza.
Pat will aggree to receive more than 0.5 beer for one pizza
Pat will aggree to receive more than 1 beer for 2 pizzas
Kris will agree to receive more than 1.5 pizza for one beer.
Kris will agree to receive more than 1 pizza for 0.67 beer.
Kris will agree to receive more than 0.75 pizza for 0.5 beer.