Amy can produce either 5,000 pounds of cheese or 20 cars per year. Mike can produce either 5,000 pounds of cheese or 10 cars per year. If both Amy and Mike produce the good in which they have comparative advantage, the total annual output of this economy will be ________.

Question

Quizplus · Accepted Answer

Amy's opportunity cost of producing cars is lower than is Mike's (250 < 500), while Mike's opportunity cost of produce cheese is lower than is Amy's (1/500 < 1/250). So Amy has a comparative advantage in cars, and Mike has a comparative advantage in cheese. If Amy specializes in producing cars, then she can produces 20 cars per year, and if Mike specializes in producing cheese, then he can produce 500 pounds of cheese per year.

Amy Can Produce Either 5,000 Pounds of Cheese or 20