Suppose that Dwight and Jim can either make salads or grill steaks.Their maximum output per hour is 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 Dwight and Jim can either make salads or grill steaks.Their maximum output per hour is 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 own PPFs, Dwight and Jim should specialize in producing the good that they have a comparative advantage in producing. To find the comparative advantage, we need to compare the opportunity costs of producing each good for Dwight and Jim. 
For Dwight, the opportunity cost of producing a steak is 1/3 salads, while the opportunity cost of producing a salad is 3 steaks. 
For Jim, the opportunity cost of producing a steak is 1/2 salads, while the opportunity cost of producing a salad is 2 steaks.
Comparing the opportunity costs, we can see that Dwight has a comparative advantage in producing salads, while Jim has a comparative advantage in producing steaks. 
Therefore, they should specialize in producing the good that they have a comparative advantage in, and then trade with each other. 
At a terms of trade of 2.5 salads per 1 steak, Dwight can produce 5 salads and Jim can produce 2 steaks. Together, they would have 5 salads and 2 steaks, which is outside both of their PPFs.

Suppose That Dwight and Jim Can Either Make Salads or Grill