Suppose Cathy and Lewis work in a bakery making pies and cakes. Suppose it takes Cathy 1.5 hours to make a pie and 1 hour to make a cake, and suppose it takes Lewis 2 hours to make a pie and 1.5 hours to make a cake. Which of the following statements is correct?
A)Cathy should specialize in both pies and cakes.
B)There are no gains from specialization and trade.
C)Lewis should specialize in pies, and Cathy should specialize in cakes.
D)Cathy should specialize in pies, and Lewis should specialize in cakes.

Question

Quizplus · Accepted Answer

For Cathy, in the time it takes her to make a pie, she could make 1.5 cakes, and in the time it takes her to make a cake, she could make 2/3 of a pie. For Lewis, in the time it takes him to make a pie, he could make 1.33 (= 2/1.5)cakes, and in the time it takes him to make a cake, he could make 3/4 of a pie. Thus, Cathy has the comparative advantage in cakes (because 2/3 < 3/4), and Lewis has the comparative advantage in pies (because 1.33 < 1.5).

Suppose Cathy and Lewis Work in a Bakery Making Pies