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microbook_3e-page25 - should specialize in producing a good...

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x Colleen has a comparative advantage in cutting logs. x Bill has a comparative advantage in gathering food. x Colleen has an ABSOLUTE advantage in the production of BOTH goods, but she has a COMPARATIVE advantage in the production of only ONE good (cut logs) . Relative Price x If Colleen and Bill valued logs and food equally, then they would trade logs for food at a one-to-one ratio. x If you prefer to think in terms of dollar values: o let the price of logs be one dollar per log: $1/log o let the price of food be one dollar per bushel: $1/bushel x so that: o the relative price of logs is one bushel per log: log bushel 1 $1/bushel $1/log o the relative price of food is one log per bushel: bushel log 1 $1/log $1/bushel Colleen’s Specialization Æ Cutting Logs x A person (country)
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Unformatted text preview: should specialize in producing a good if its opportunity cost is less than the relative price of that good. o Colleen should specialize in logs because her opportunity cost of cutting logs is less than the relative price of logs. o By contrast, Bill should not cut logs because his opportunity cost of cutting logs is greater than the relative price of logs. log bushels 1.6 log bushel 1 log bushels 0.83 logs of cost opp. s Bill' logs of price rel. logs of cost opp. s Colleen' ? ? Colleens Gains from Trade x By specializing in cutting logs and trading her logs for food, Colleen gains more food (per day of work) than if she gathered food herself. day 1 bushels 10 day 1 bushels 12 log 1 bushel 1 * day 1 logs 12 ! Page 25...
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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