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1) Suppose Fred can produce both cakes and lemonade using fewer inputs than Sarah
1) Suppose Fred can produce both cakes and lemonade using fewer inputs than Sarah. What is this concept called? Can Fred benefit from trade with Sarah, or should he be self-sufficient? Explain your answer.
2. At a price of $35 per set, Brent rents out 80 sets of skis per day. In peak season he can charge $45 per set and rents out 150 sets of skis per day. Explain how it is possible for both price and quantity of ski rentals to increase in peak season. Does this violate the law of demand? Show this situation on a graph.
Expert Solution
Question 1
This concept is called absolute advantage, that Fed can produce both at a lowest costs than Sarah. The Fred can still benefit from trade with Sarah, as long as they have different comparative advantage.
Question 2
This is not a violation of the law of demand. The law of demand states that quantity demanded for a good declines with the price of the good, holding other factors constant. In this question, when we compare the number of rental between lean season and peak season, the other facts are not held constant. Hence, the law of demand is not violated.
Despite the price increase in peak season, the quantity demanded could increase in the peak season due to increased demand resulting from other factors such as vocation time, pleasant weather, etc. In a graph, this is represented by a shift of the demand curve.
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