Please help! Lorraine and Jake can produce any combination of peaches and nectarines described by the production possibilities curve above using the same amount of resources. Who has the absolute advantage in the production of each product? Explain. Who has the comparative advantage in the production of each product? Explain. Who will specialize in the production of each product? Explain using the concept of opportunity cost.

Answer 1:

The first thing to note is their production possibilities are typified using a straight line. This means their opportunity costs are constant.

Whichever way it is looked at, Lorain has the absolute advantage in the production of Peaches and Nectarines.

Explanation 1

When a producer is able to manufacture goods or services in greater quantity for the same cost, or the same quantity at a lower cost than its competition it is said to have Absolute Advantage over them.

From the graph, it is clear that Lorain has more resources than Jake. Resources could include but are not limited to Human Capital, Land, Vehicles, Production Equipment etc. If both companies used their resources to produce peaches, at its best, Lorain would produce 200 units while Jake would only hit 150 Units.

Having the ability to produce more gives Loraine the advantage of economies of scale. This means that Loraine is able to produce at a lower cost. Lower costs mean Loraine is able to charge lower prices in return.

Answer 2

The party with the lowest opportunity cost has the highest comparative advantage.

The highest comparative advantage for the production of peaches goes to Jake whilst the highest comparative advantage for the production of Nectarines goes to Loraine.

Explanation 2

To get the opportunity cost in each case, one would need to layout the information on the graph in tables. Please see the attached table for the solution showing each producers production possibility and their opportunity costs.

You would note that Loraines' opportunity cost for Peaches is 1.25 Nectaraines while Jakes opportunity cost for Peaches is 0.67 Nectarines. Both figures are obtained by making the production figure for Peaches the denominator and dividing the production amount of Nectaraine by that amount.

E.g.

Loraine (Peaches Opportunity Cost) = 250/200= 1.2 Nectaraines

Jake (Peaches Opportunity Cost) = 100/150 = 0.67 Nectaraine

To obtain the opportunity cost for Nectarines, the equation is reversed.

From the calculations, it's clear to see that it would cost Loraine 1.25 Nectarines to produce one Peache and Jake, 0.67 Nectarine to produce one Peach.

On the other hand, it would cost Loraine 0.8 Peach to produce one Nectaraine and Jake, 1 and a half peaches to produce one Nectarine.

Both Loraine and Jake, therefore, would be better off trading with one another.

Answer 3

Also, given the opportunity costs, Loraine would be better off producing Nectarines given that she incurs less opportunity cost and even produces more Nectarines using her resources.

Jake, on the other hand, should adopt a strategy that allows him to specialize in the production of Peaches. He incurs less opportunity cost whilst doing that. He also produces more of that if he used all his resources.

Cheers!

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