Lucy can make either 30 boxes of chocolate or 10 loaves of bread in a week if she devotes all of her time to the one or the other. She can also make combinations of the two goods at a constant opportunity cost, so her production possibilities curve is a straight line. Ricky can make either 16 boxes of chocolate or 8 loaves of bread if he devotes all his time to the one or the other, or combinations of the two goods at a constant opportunity cost. He also has a linear production possibilities curve, therefore.
Graph each person’s production possibility curve. Also write the equation for each.
Identify the opportunity cost of chocolate and bread for Lucy. Do the same for Ricky. Who has
the comparative advantage in chocolate? Why? Who has the comparative advantage in bread?
Why? Who has the absolute advantage in each good and why?
Suppose that they are each self-sufficient – they don’t trade with each other. Lucy produces and
consumes 15 boxes of chocolate and 5 loaves of bread per week, while Ricky produces and
consumes 12 boxes of chocolate and 2 loaves of bread per week, Show for each person that these
combinations are on the production possibility curves of each.
Suppose we allow trade. Let each person specialize in producing the good in which they have a
comparative advantage. Describe the range of possible trades of chocolate for bread that will
allow both to consume more of both goods than they are currently consuming. Pick one such
trade and explain how it is mutually beneficial. Verify that the terms of trade-chocolates per loaf
of bread-lie between Lucy and Ricky’s respective opportunity costs of bread.
