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5. The
answer is c; Stella has an absolute advantage at both tasks, for the
reason given.
If each specializes completely in the good for which he has a comparative advantage, Harry will produce 10 beers and Larry will produce 15 pizzas. Suppose they trade 5 pizzas for 5 beers. Each will thus consume more pizza and beer than in part (d). The only requirements are that the chosen output be possible and that Larry and Harry each consume at least as much of both goods as in part (d).
7. b. Harry has an absolute advantage in making pizza, since he can produce more pizza per hour than Larry. Harry also has an absolute advantage in brewing beer, since he can produce more beer per hour than Larry. c. Larry has a comparative advantage in making pizza. His opportunity cost of producing one pizza is ½ of a beer, while Harry’s opportunity cost of producing one pizza is 4/3 of a beer. But Harry has a comparative advantage in brewing beer. His opportunity cost of producing one beer is ¾ of a pizza, while Larry’s opportunity cost of producing one beer is 2 pizzas. d. Harry will drink 6 beers and eat 1.5 pizzas. Larry will eat 2 pizzas and drink 1 beer. e. The joint PPC for Larry and Harry:
If each specializes in the good for which he has a comparative advantage, Harry will produce 8 beers and Larry will produce pizzas. If they trade 2 pizzas for 1.5 beers, Harry will consume 6.5 beers and 2 pizzas, and Larry will consume 2 pizzas and 1. 5 beers. Notice that each can do better by specializing, even though Harry has an absolute advantage in producing both beer and pizza.
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