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Assume that two people, Michelle and James each live alone in an isolated region. They each encompass the similar resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can increase 200 pounds of potatoes per year. If she devotes all her resources to raising chickens, she can increase 50 chickens per year. (If she apportions some resources to each, then she can produce any linear combination of chickens and potatoes which lies between those extreme points. If James devotes all his resources to growing potatoes, he can increase 80 pounds of potatoes per year. If he devotes all his resources to raising chickens, he can raise 40 chickens per year. (If he apportions some resources to each, then he can produce any linear combination of chickens and potatoes which lies between those extreme points.) Potatoes Chickens Michelle 200 50 James 80 40

What do you mean by Michelle's opportunity cost of producing potatoes? What is Michelle's opportunity cost of producing chickens? What is Jame's opportunity cost of producing potatoes? What is Jame's opportunity cost of producing chickens? Which person has an absolute benefit in which activities? Which person has a comparative?

Assume that they are thinking of each specializing completely in the area in which they have a comparative benefit, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Describe.

How would you extend the above narrative to businesses, society as a whole or nations? Describe. 

Accounting Basics, Accounting

  • Category:- Accounting Basics
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