Mary takes 4 minutes to make a sandwich and 6 minutes to mix a cocktail. Her sister Ash takes 4 minutes to make a sandwich and 4 minutes to mix a cocktail. Calculate each sister's opportunity cost
Which of the two sisters has an absolute advantage in making sandwiches? In mixing cocktails? Which of the two has a comparative advantage in making sandwiches? In mixing cocktails?
Mary can spend an hour to make 15 sandwiches or mix 10 cocktails, which means 1 sandwich costs her 10 cocktails ÷ 15 sandwiches = 0.67 of a cocktail per sandwich while 1 cocktail costs her 15 sandwiches ÷ 10 cocktails = 1.5 sandwiches per cocktail. Ash can spend an hour to make 15 sandwiches or mix 15 cocktails, which means 1 sandwich costs her 15 cocktails ÷ 15 sandwiches = 1 cocktail per sandwich and 1 cocktail costs 1 sandwich per cocktail. The sisters are equally productive in sandwiches (15 sandwiches per hour) and therefore neither of them has an absolute advantage in sandwiches. But Ash has an absolute advantage in cocktails. She can mix 15 cocktails per hour while Mary can only mix 10. To see the sisters' comparative advantage we compare their opportunity costs. Mary's opportunity cost of a sandwich (0.67 of a cocktail per sandwich) is lower than Ash's (1 cocktail per sandwich), so Mary has a comparative advantage in sandwiches. Ash's opportunity cost of a cocktail (1 sandwich per cocktail) is lower than Mary's (1.5 sandwiches per cocktail), so Ash has a comparative advantage in cocktails.
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