Suppose that Leslie and Hussein can either make salads or grill steaks.Their maximum outputs per hour are listed in the following table.Given the same quantity of resources,at what terms of trade (relative price ratio)could they specialize and trade so that both consume outside their own production possibilities frontiers (PPFs)?
A) 1 salad per 1 steak
B) 2 salads per 1 steak
C) 2.5 salads per 1 steak
D) 3 salads per 1 steak
E) 3.5 salads per 1 steak

Question

Suppose that Leslie and Hussein can either make salads or grill steaks.Their maximum outputs per hour are listed in the following table.Given the same quantity of resources,at what terms of trade (relative price ratio)could they specialize and trade so that both consume outside their own production possibilities frontiers (PPFs)? 
A) 1 salad per 1 steak 
B) 2 salads per 1 steak 
C) 2.5 salads per 1 steak 
D) 3 salads per 1 steak 
E) 3.5 salads per 1 steak

Quizplus · Accepted Answer

To consume outside their PPFs, Leslie and Hussein need to specialize in producing the good in which they have a comparative advantage (i.e. the good they can produce at a lower opportunity cost) and trade with each other.

Leslie has a comparative advantage in making salads as she can make either 6 salads or 2 steaks in an hour, which means she can make 3 salads for every steak given up.

Hussein has a comparative advantage in grilling steaks as he can make either 4 salads or 4 steaks in an hour, which means he can make 1 steak for every salad given up.

Therefore, if they trade at a ratio of 2.5 salads per 1 steak (C), Leslie can produce 10 salads and no steaks (that is, 4 salads she'd make on her own and 6 that she'd get from trading 2.4 steaks with Hussein), while Hussein could produce 2.4 steaks and trade them for 6 salads. Thus, both of them would consume outside their PPFs by consuming a combination of steaks and salads that they wouldn't be able to produce on their own.

Suppose That Leslie and Hussein Can Either Make Salads or Grill