Suppose we have a two-person world with only Shaq and his friend, LeBron. Suppose that Shaq can move 40 boxes in an hour or could bake 20 cookies in an hour. Suppose that LeBron could move 20 boxes in an hour or bake 5 cookies in an hour. Is it to their advantage to trade?
What will be an ideal response?
Yes, trade is advisable. Shaq should make cookies while LeBron moves boxes, since Shaq has a comparative advantage in making cookies, and LeBron has a comparative advantage in moving boxes.
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Shaq has a comparative advantage in making cookies. Each cookie Shaq makes has an opportunity cost of 2 boxes for him. Each cookie LeBron makes has an opportunity cost of 4 boxes for him. Shaq has the lower opportunity cost and, therefore, the comparative advantage in making cookies. Meanwhile, for moving boxes, LeBron has an opportunity cost of 1/4 of a cookie to move a box, which is lower than the cost of 1/2 cookie for Shaq. Therefore LeBron has a comparative advantage in moving boxes. Because of these comparative advantages, Shaq will make cookies and trade them to LeBron for moving boxes.
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