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Unformatted text preview: 40 Chickens = 80 Potatoes 1 Chicken = 1/40 x 80 = 2 Potatoes Opportunity Costs= 2 Potatoes * Which person has an absolute advantage in which activities? * Michelle has an absolute advantage as she produces both more chickens and potatoes. * Which person has a comparative? * James has a comparative advantage to produce chickens because his opportunity costs are lower than Michelle. But Michelle has a comparative advantage to produce potatoes because she has a lower comparative advantage to James. Economic Concepts 3 * Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain. James would specialize in Chickens. 1 Chicken = 2.5 Potato Trade 80/2.25 Potatoes = 36 Chickens Michelle would specialize in Potatoes 1 Chicken = 2.5 Potato Trade 50/2.25 Potatoes= 22.2 Chickens References...
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