B201 Comparative Advantage Notes 2

B201 Comparative Advantage Notes 2 - Person Task Time Time...

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Comparative Advantage You can’t do everything you should and you shouldn’t do everything you can So, you are better at mowing the lawn and changing the oil on your car—should you perform both tasks or hire someone to do one of these things for you. Why don’t you make your own iPod? When was the last time you made french-fries? When was the last time you made a latte’? TERMS Comparative Advantage Absolute Advantage Opportunity Cost EXAMPLE Suppose you could cook a chicken dinner in 1 hour and 30 minutes and you could vacuum your house in 30 minutes. Your room-mate, Marty, can cook a chicken dinner in 1 hour and 20 minutes and can vacuum the house in 20 minutes. Question Should Marty do everything? How do I answer this question? You want to know your comparative advantage and Marty’s comparative advantage.
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Table 1. Time to Perform task Hours to Cook 1 Chicken Hours to Vacuum House You 1.50 0.50 Marty 1.30 0.30 To find opportunity cost:
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Unformatted text preview: Person Task Time Time opportunity Cost You 1 Chicken x vacuume hour vacuume x chicken hour 3 5 . 1 1 5 . 1 = Marty 1 chicken x vacuume hour vacuume x chicken hour 3 . 4 3 . 1 1 3 . 1 = ============================================= You 1 vacuum x chicken hour Chicken x vacuume hour 33 . 5 . 1 1 1 5 . = Marty 1 vacuum x chicken hour Chicken x vacuume hour 23 . 3 . 1 1 1 3 . = Person with the has the lowest opportunity cost of performing the TASK. So, that person should perform the TASK: You should cook chicken and Marty should vacuum the house. You should notice that Marty has an absolute advantageMarty does both tasks quicker than you. But, you have a comparative advantage in cooking chicken and Marty has a comparative advantage in vacuuming the house. Even though Marty is better at everything, Marty is more better at vacuuming and you are less worse at cooking chicken....
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B201 Comparative Advantage Notes 2 - Person Task Time Time...

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