Crystal and Hilary are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Crystal takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Hilary takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.

Required:
a. What is each roommate'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 beet What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.

Question

14-09-2020
Business

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Crystal and Hilary are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Crystal takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Hilary takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.

Required:
a. What is each roommate'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 beet What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.

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Answer:

a)

Crystal's opportunity cost to brew a gallon of root beer = 4/2 = 2 pizzas

Crystal's opportunity cost to make a pizza = 2/4 = 0.5 gallons of root beer

Hillary's opportunity cost to brew a gallon of root beer = 6/4 = 1.5 pizzas

Hillary's opportunity cost to make a pizza = 4/6 = 0.33 gallons of root beer

Crystal has the absolute advantage in making pizza (lowest time to make a pizza)

Crystal has the comparative advantage in making pizza (lowest opportunity cost).

b)

Crystal should trade pizza in exchange for root beer (she has the comparative advantage in making pizza)

c)

As long as the trading price of pizza is between 2/3 gallons of root beer (highest price) and 1/2 gallons of root beer (lowest price), both would benefit from the exchange. If the price of pizza is higher than 2/3 gallons of root beer, then Hillary will make her own pizza. If the price of pizza is lower than 1/2 gallons of root beer, then Crystal would brew her own root beer.