Bill and Jen are the only two people in an economy.Each has 10 hours in which they can make either croissants, juice or some combination of both products.In takes Bill one hour to make one croissant and one hour to make a litre of juice.It takes Jen 20 minutes to make a croissant and 40 minutes to make a litre of juice.If the parties trade, which statement is true?

Question

Quizplus · Accepted Answer

Jen has a comparative advantage in producing both goods since she can produce them more efficiently than Bill. However, her advantage is greater in croissant production (3 croissants per hour vs. 1.5 litres of juice per hour). Bill, with no comparative advantage, will specialize in the good with less relative inefficiency, which is juice (since his production rate is the same for both goods). The price of a croissant in terms of juice must make trade desirable for both, hence it will be between the opportunity costs of the two producers, which is between ½ (Bill's rate of substitution) and ⅔ (Jen's rate of substitution) litres of juice per croissant.

Bill and Jen Are the Only Two People in an Economy.Each