Question

Suppose that three volunteers are preparing cookies and cupcakes for a bake sale. Diana can make 27 cookies or 18 cupcakes per hour; Andy can make 25 cookies or 17 cupcakes; and Sam can make 10 cookies or 12 cupcakes. [LO 2.2] a. Who has the absolute advantage at making cookies? b. At making cupcakes?

Short answer

Diana has the absolute advantage in both making cookies and cupcakes.

Step-by-step solution

Determine Cookies Made Per Hour

Each volunteer has a different capability of making cookies per hour. Diana can make 27 cookies, Andy can make 25 cookies, and Sam can make 10 cookies per hour. To determine who has the absolute advantage, we compare these numbers. Diana can make the most cookies per hour with 27 cookies.

Determine Cupcakes Made Per Hour

Each volunteer also has a different capability for making cupcakes per hour. Diana can make 18 cupcakes, Andy can make 17 cupcakes, and Sam can make 12 cupcakes per hour. We compare these numbers to see who makes the most. Diana can make the most cupcakes per hour with 18 cupcakes.

Key concepts

Opportunity Cost

Opportunity cost is a key concept in economics that helps us understand the cost of choosing one option over another. It's not just about monetary cost—it's about what you give up to pursue a certain task or activity. When considering the bake sale scenario:

• Each volunteer must decide how best to allocate their time to maximize output based on their skills.
• For instance, Diana's opportunity cost of making 27 cookies in one hour is not being able to make 18 cupcakes during that same hour. Thus, for every hour Diana makes cookies, she sacrifices the opportunity to make cupcakes.
• Similarly, Andy and Sam face their own opportunity costs. Andy's choice of making 25 cookies means he's giving up the chance to make 17 cupcakes, and Sam gives up making 12 cupcakes to produce 10 cookies.

Computing opportunity costs helps each volunteer decide whether they should focus on what they do best or diversify their production. Understanding opportunity costs is crucial for optimizing resource allocation and increasing total output.

Production Possibility Frontier

The production possibility frontier (PPF) is a useful way to visualize the trade-offs and efficiency in production choices. It illustrates all possible combinations of two goods that can be produced, considering resource limitations. Let's apply this to the bake sale:

• For each volunteer, imagine their PPF as a graph where one axis represents cookies and the other represents cupcakes.
• Diana's PPF curve would show the maximum combinations she can achieve in an hour, like opting entirely for 27 cookies or 18 cupcakes, or any combination in between.
• PPF also reflects the maximum efficiency. If Diana is not on her PPF—let's say making less than her potential—she's using resources inefficiently.
• The slope of each volunteer’s PPF represents their opportunity cost, aiding them to understand what is forgone by increasing the production of one item over the other.

A PPF helps clarify production capabilities and allows the volunteers to visualize trade-offs, aiding optimal production strategies.

Comparative Advantage

Comparative advantage, unlike absolute advantage, refers to the ability of an individual to produce a good at a lower opportunity cost than others. It's a fundamental economic principle that guides specialization and trade:

• In our cookie and cupcake scenario, Diana has the absolute advantage in both cookies and cupcakes, but the comparative advantage is about who incurs the least opportunity loss in production.
• Let's calculate the opportunity cost for each task to discover comparative advantage. Consider Diana's time for cookies versus cupcakes, where the ratio is 27 cookies to 18 cupcakes.
• Similarly, compare Andy’s trade-off between cookies (25) and cupcakes (17), and Sam’s (10 cookies versus 12 cupcakes).
• If Diana's opportunity cost of cookies is lower relative to Andy and Sam's, she should stick to cookies, while others might focus on where their own opportunity costs are less.

Comparative advantage helps determine the best specialization strategy, guiding each person on what they should ideally focus on to contribute most effectively to the bake sale.