Gary and Brenda both have similar businesses in the garment industry making caps and backpacks. In one day, Gary can make 60 caps and 12 backpacks when he divides his production resources equally between the two products. In one day, Brenda can produce 80 caps and 20 backpacks. Answer the following questions and show all calculations to support your answers. a. Who has the comparative advantage in producing backpacks? Explain with calculations. b. What is Brenda's opportunity cost of making a cap compared to Gary's? Explain with calculations. c. Based on your calculations in a) and b) above, who should specialize in making what if they intend to trade? Explain with calculations.
Gary and Brenda both have similar businesses in the garment industry making caps and backpacks. In one day, Gary can make 60 caps and 12 backpacks when he divides his production resources equally between the two products. In one day, Brenda can produce 80 caps and 20 backpacks. Answer the following questions and show all calculations to support your answers.
a. Who has the
b. What is Brenda's
c. Based on your calculations in a) and b) above, who should specialize in making what if they intend to trade? Explain with calculations.
d. If Gary and Brenda decide to specialize in what they do best, what would be the new production per day for each of them? Explain with calculations.
e. If Gary and Brenda decide to trade, what would be the terms of trade for a backpack and how does each benefit from trading? Explain with calculations.
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Comparative advantage is a principle where one entity or country can produce a particular good or service at a lower opportunity cost than others. It forms the basis for international trade, as entities specialize in what they do best, leading to greater overall efficiency and benefits for all.
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