Suppose George can make 12 coffees or six croissants in an hour. Lewis can make 15 coffees or 10 croissants in an hour. Under these conditions there will be no benefit to Lewis to trade with George.

Question

Quizplus · Accepted Answer

To determine whether or not there is a benefit to trade, we need to compare the opportunity costs of each person.

For George, his opportunity cost of making 1 coffee is giving up the ability to make 0.5 croissants (since he can make 12 coffees or 6 croissants in an hour).

For Lewis, his opportunity cost of making 1 coffee is giving up the ability to make 0.67 croissants (since he can make 15 coffees or 10 croissants in an hour).

Since George's opportunity cost of making 1 coffee is lower than Lewis's opportunity cost, George has a comparative advantage in making coffee. Similarly, since George's opportunity cost of making croissants is lower than Lewis's opportunity cost, George has a comparative advantage in making croissants.

Therefore, there is a benefit to trade since both parties can specialize in what they have a comparative advantage in and trade with each other. George can specialize in making croissants and trade with Lewis for coffee, while Lewis can specialize in making coffee and trade with George for croissants.

Suppose George Can Make 12 Coffees or Six Croissants in an Hour