Agnes can produce either 1 unit of X or 1 unit of Y in an hour, while Brenda can produce either 2 units of X or 4 units of Y in an hour. There can be gains from exchange
A) only if Brenda becomes faster at producing X or Y.
B) only if Agnes becomes faster at producing X.
C) if Agnes specializes in the production of X and Brenda specializes in the production of Y.
D) if Agnes specializes in the production of Y and Brenda specializes in the production of X.

Question

Quizplus · Accepted Answer

According to the principle of comparative advantage, it is beneficial for each person to specialize in the production of the good they have a lower opportunity cost in producing. In this case, Agnes has an opportunity cost of 1Y for producing 1X, while Brenda has an opportunity cost of 0.5Y for producing 1X. Therefore, it is more efficient for Agnes to specialize in producing X, while Brenda specializes in producing Y, leading to gains from trade for both parties.

Agnes Can Produce Either 1 Unit of X or 1