Question

Juan and Wanda both make pancakes and bacon. If we compare the opportunity costs and possible gains from trade for Juan and Wanda, we can determine the exact exchange ratio at which the parties will agree to trade?

Answer 1

Answer:

Comparing the opportunity cost and possible gains for both Juan and Wanda helps to determine which party should produce Pancakes and who should produce Bacon.

In other words, it reveals where their comparative advantages lie.

The party with the lowest opportunity cost in a particular product has the highest Comparative Advantage.

Explanation:

If for instance, the ratios give off Juan as having the highest opportunity cost in the production of Pancakes, when compared with Bacon and Wanda has the highest opportunity cost in the production of Bacon when compared to pancakes then Juan should focus on producing Bacon and Wanda Pancakes whilst they trade with each other for the other product where their comparative advantage is lowest.

Cheers!