Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds

Unit 1 IP

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1. What is Michelle’s opportunity cost of producing potatoes?

2. What is Michelle’s opportunity cost of producing chickens?

3. What is James’ opportunity cost of producing potatoes?

4. What is James’ opportunity cost of producing chickens?

5. Which person has an absolute advantage in potatoes?

6. Which person has an absolute advantage in chicken?

7. Which person has comparative advantage in potatoes?

8. Which person has comparative advantage in chicken?

9. 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.

10. How would you extend the above narrative to businesses, society as a whole or nations? Explain.

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