Consider Babs and Donna, who can each produce cake, beer, or some combination of the two using only 40 hours of labor each. Babs can produce a maximum of 120 cakes if she produces no beer, and 150 units of beer if she produces no cake. Donna can produce a maximum of 40 cakes with no beer produced; if she makes no cake, she can produce 100 units of beer. In autarky, each producer spent half of her time producing cake and the other half producing beer. But now let's say that Babs and Donna decide to trade with each other. They decide that each producer will fully specialize in the good where she has comparative advantage. Later, they will work out the details on how much beer will trade for how many cakes and vice versa. Calculate the gains in trade in cakes that Babs and Donna together (as a group) will experience due to trading. In other words, tell me how many more cakes the two of them can now consume (together) by trading instead of remaining in autarky.
Consider Babs and Donna, who can each produce cake, beer, or some combination of the two using only 40 hours of labor each. Babs can produce a maximum of 120 cakes if she produces no beer, and 150 units of beer if she produces no cake. Donna can produce a maximum of 40 cakes with no beer produced; if she makes no cake, she can produce 100 units of beer.
In autarky, each producer spent half of her time producing cake and the other half producing beer. But now let's say that Babs and Donna decide to trade with each other. They decide that each producer will fully specialize in the good where she has
Calculate the gains in trade in cakes that Babs and Donna together (as a group) will experience due to trading. In other words, tell me how many more cakes the two of them can now consume (together) by trading instead of remaining in autarky.
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