The economy consists of two consumers darnell and beth they...

The economy consists of two consumers, Darnell and Beth. They have ordered a pizza and are deciding how to divide it between themselves. They have brainstormed a few solutions, and now they want to consult an economist to determine if their solutions are efficient and fair. Assume that a pizza consists of eight slices, and the more pizza Darnell and Beth eat, the happier they are. One of their solutions is to have Beth eat four slices, Darnell eat three slices, and have them leave one slice in the box for no one to eat. An economist would say this solution is .

Transcript

00:01 In this question, we're essentially treating two roommates, diego and darnell, as two countries who want to engage in trade.

00:08 Right.

00:08 So they give us these rates of work, right, that both diego and darnell can achieve.

00:15 Right.

00:16 So for diego, excuse me, we're given that diego can make one rear in four hours and one pizza in two hours.

00:24 While his roommate darnell can make one room beer in six hours and one pizza in four hours.

00:28 So in order to see if they will engage in trade, we have to first figure out their opportunity costs so we can figure out who has comparative and absolute advantages.

00:41 So first, what is an opportunity cost, right? a quick review, it's basically just the cost of making a good in terms of making the other good that you could possibly make, right? so how much root beer does it cost you to make one pizza? so first, in order to figure these out, let's standardize how much root beer.

00:58 And pizza we can make per hour.

01:01 So if we can make one rib beer in four hours, if we divide one over four, we can get one -fourth.

01:07 I'll just do group beer in one hour, right? and similar, we can make one, or sorry, oh yeah, one -half pizza in one hour.

01:20 All right, and then now what we do is if we know how much we can make per hour, we can say per hour we can either make one -fourth root beer, or we could make one -half pizza, right? their time to make it is the same.

01:32 So that's why we can put an equal sign there.

01:35 All right.

01:35 So then if we want to figure out how much it costs to make, say, one unit of root beer, all we have to do is divide both sides by one -fourth, right, to eliminate that on the left side.

01:48 All right, and then we're going to get that it costs.

01:50 So to make one root beer, it's going to cost us two pizza.

01:57 All right, and then if we do the same thing, we're going to get that one pizza, costs us 1 .5 or 0 .5 root beer.

02:08 All right.

02:09 Now if we do the same thing over here, first let's standardize per hour, right? so we can make 1 6th root beer per one hour, or we could make 1 fourth pizza per hour.

02:26 All right, so then per hour we could either make 1 6th root beer or 1 4 pizza.

02:33 All right, so then if we divide both sides by one sixth, then we will see that one rupeer is going to be equal to 1 .5 pizza and one pizza is going to be equal to two -thirds root here.

02:51 All right.

02:53 Now, now that we have our opportunity costs, we can see who has a comparative advantage.

02:58 And first we can see who has absolute advantage, right? so absolute advantage just means who can make the most root beer or pizza in the shortest amount of time, right? so let's see.

03:11 So for diego, we have root beer.

03:13 He can make one in four hours.

03:15 Darnell can make the same in six hours.

03:17 So since it takes diego less amount of time to make the same amount, we're going to say that he has the absolute advantage.

03:24 Put absolute next to his root beer.

03:27 All right.

03:27 And next we have diego can make a pizza in two hours, whereas darnell can make a pizza.

03:31 And four...