Megan and Susan are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Megan takes 3 hours to brew a gallon of root beer and 2 hours to make a pizza. Susan takes 7 hours to brew a gallon of root beer and 5 hours to make a pizza. Megan's opportunity cost of making a pizza is ??

2/3 gallon

5/7 gallon

1 1/2 gallons

1 2/5 gallons

of root beer, and Susan's opportunity cost of making a pizza is ???

2/3 gallon

5/7 gallon

1 1/2 gallons

1 2/5 gallons

of root beer.

Who ?? has an absolute advantage in making pizza, and who ?? has a comparative advantage in making pizza?

If Megan and Susan trade foods with each other who ?? will trade away pizza in exchange for root beer.

The price of pizza can be expressed in terms of gallons of root beer. The highest price at which pizza can be traded that would make both roommates better off is ??? of root beer, and the lowest price that makes both roommates better off is ??? of root beer per pizza.

See explanation

Explanation:

a) Megan's opportunity cost of making pizza:

It takes Megan 2 hours to make 1 pizza and 3 hours to produce one root beer. If she spends the time used in producing pizza to produce root of beer, in 2 hours she can produce 2/3 gallons of root beer.

Therefore, the opportunity cost of making a pizza for Megan = 2/3 gallon of root beer.

b) Susan's opportunity cost of making a pizza:

It takes Susan 5 hours to make 1 pizza and 7 hours to produce a gallon of root beer. If she spend the time used in making pizza to produce root beer, in 5 hours she can produce 5/7 gallons of root beer.

Therefore, the opportunity cost of making a pizza for Susan = 5/7 gallon of root beer.

c) Megan has an absolute advantage in making pizza because it takes lesser time to make pizza i.e 2 hours, compared to Susan's 5 hours.

Megan has a comparative advantage in making pizza because she has a lower opportunity cost in making pizza i.e 2/3 gallons of root beer, compared to Susan i.e 5/7 gallons of root beer.

d) Since Megan has a comparative advantage in making pizza, she will make pizza and exchange it for root beer that Susan makes.

e) The highest price of pizza in terms of root beer that will make both roommates better off is 5/7 of a gallon of root beer.  If the price is higher than this, then Susan would rather make her own pizza instead of trading for pizza that Megan makes.

The lowest price of pizza in terms of root beer that will make both roommates better off is 2/3 gallon of root beer.  If the price is lower than this, then Megan would prefer making her own root beer rather than trading for root beer that Susan makes.

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