You are running a bakery. Jim and Jessica are working for you as bakers. Both of them work for four hours a day, and they are paid by the hour. On each day of the week, Jim spends 2 hours making 6 cakes and 2 hours baking 3 apple pies, and Jessica spends 2 hours making 4 cakes and 2 hours baking 3 apple pies.
Cakes and apple pies are sold at the same price of $30 each. So your total revenue each day is $480.
After taking Business Economics, you think you can apply comparative advantage in your business. The comparative advantage theory says one should specialize in producing the good with lower opportunity cost.
Please answer the following questions. Assume there is enough demand for cakes and apple pies.
- What is Jim's opportunity cost of making a cake? What is Jim's opportunity cost of baking an apple pie? (Show your work.)
- What is Jessica's opportunity cost of making a cake? What is Jessica's opportunity cost of baking an apple pie? (Show your work.)
- According to the comparative advantage theory, who should specialize in making cakes? Who should specialize in baking pies? Why?
- (Based on your answers to part 3) How much will the total revenue increase if you simply change both workers' schedules and ask them to engage in specialization? Explain.