Question

a. which producer has the comparative advantage in producing puzzles?
○ lewis
○ geppetto

b. which producer has the comparative advantage in producing puppets?
○ geppetto
○ lewis

c. if both producers decided to trade with each other to stock their toy stores, the terms of trade that would benefit both geppetto and lewis (1 puppet = x puzzles) would be between
○ 1.25 and 7.00 puzzles per puppet.
○ 0.80 and 0.14 puzzles per puppet.
○ 1.25 and 0.14 puzzles per puppet.
○ 0.80 and 7.00 puzzles per puppet.

Explanation:

Step1: Calculate Geppetto's puzzle OC

Opportunity cost (OC) of 1 puzzle = $\frac{\text{Max puppets}}{\text{Max puzzles}} = \frac{20}{140} = \frac{1}{7} \approx 0.14$ puppets

Step2: Calculate Lewis's puzzle OC

OC of 1 puzzle = $\frac{\text{Max puppets}}{\text{Max puzzles}} = \frac{40}{50} = 0.8$ puppets

Step3: Compare puzzle OCs for part a

Geppetto has lower OC for puzzles.

Step4: Calculate Geppetto's puppet OC

OC of 1 puppet = $\frac{\text{Max puzzles}}{\text{Max puppets}} = \frac{140}{20} = 7$ puzzles

Step5: Calculate Lewis's puppet OC

OC of 1 puppet = $\frac{\text{Max puzzles}}{\text{Max puppets}} = \frac{50}{40} = 1.25$ puzzles

Step6: Compare puppet OCs for part b

Lewis has lower OC for puppets.

Step7: Find beneficial terms for part c

Terms of trade for 1 puppet must be between Lewis's OC (1.25 puzzles) and Geppetto's OC (7.00 puzzles).

Answer:

a. Geppetto
b. Lewis
c. 1.25 and 7.00 puzzles per puppet.