Title

Monica and Rachel are flatmates. They spend most of their time working, but they leave some time for

Description

Monica and Rachel are flatmates. They spend most of their time working, but they leave some time for their favourite activities - making pizza and fine coffee. Monica takes five minutes to make a pot of coffee and half an hour to make a pizza. Rachel takes 15 minutes to make a pot of coffee and one hour to make a pizza.

a What is each flatmate's opportunity cost of making a pizza? Who has the absolute advantage in making pizza? Who has the comparative advantage in making pizza?

b If Rachel and Monica trade foods with each other, who will trade away pizza in exchange for coffee?

c The price of pizza can be expressed in terms of pots of coffee. What is the highest price at which pizza can be traded that would make both flatmates better off? What is the lowest price? Explain.