Kate and Sarah own a bakery together The two figures illustr

Kate and Sarah own a bakery together. The two figures illustrate the production possibilities available to them if they work at their bakery for 8 hours. Answer the following questions using these figures.

Solution

If Kate and Sarah both work for 8hours then, Kate produces cakes only and Sarah produces breads only.

Relative price of bread is more for Sarah(8/9) than Kate(4/12=1/3=3/9). Hence, Sarah produces more breads as par the comparative advantage. On the otherhand, relative price for cakes is lower for Kate(9/8) than that of Sarah(12/4=3=24/8). Hence, Kate will produce cakes only.

So if Kate produce total cakes then, total 8 units of cakes are produce. On the otherhand, Sarah produce 12units of breads only.

Thus, the third option is right.

	Breads	Cakes
Kate	4	12
Sarah	8	9