Ellie and Brendan both produce apple pies and vanilla ice cream. If Ellie's opportunity cost of one apple pie is 1/2 gallon of ice cream and Brendan's opportunity cost of one apple pie is 1/4 gallon of ice cream, a mutually advantageous trade can be struck at a price of one apple pie for 1/3 gallon of ice cream.

Question

Quizplus · Accepted Answer

Ellie's opportunity cost (1/2 gallon of ice cream for one apple pie) is higher than the proposed trade price (1/3 gallon of ice cream for one apple pie), meaning she benefits by trading apple pies for more ice cream than she would have to give up to make them herself. Brendan's opportunity cost (1/4 gallon of ice cream for one apple pie) is lower than the trade price, meaning he benefits by trading ice cream for apple pies, as he gives up less ice cream than he would have to produce an apple pie himself. This makes the trade mutually advantageous.

Ellie and Brendan Both Produce Apple Pies and Vanilla Ice