Question

Al can make 10 chocolate and 5 candies a year and Betty can make 30 chocolate and 10 candies a year.

1 Who has the absolute advantage in making chocolate? Candies? Answer:

2 Who has the comparative advantage in making chocolate? Candies? Answer:

3 If Al and Betty were to trade with each other, which one would Al trade away Answer:

Answer 1

Answer:

1. Betty ; 2. Betty ; 3. Candies

Explanation:

Absolute Advantage is when one can produce more output of a good per unit of input , comparatively than other .

Comparative Advantage is when one can produce a good's output by comparatively lesser opportunity cost (other good sacrifised) than other .

AI : Chocolates = 10 , Candies = 5

Betty : Chocolates = 30 , Candies = 10

As it can be seen : Betty can produce both of more - chocolates (30) & candies(10) than AI (10,5) . So, it has Absolute Advantage in both - Candies & Chocolates.

However, AI is twice more productive in chocolates than toffees (10,5) ; but Betty is thrice more productive in chocolates than toffees (30,10). Comparatively, Betty is more productive in Chocolates. So opportunity cost of Chocolate in terms of sacrifised toffees is less for Betty 0.33 (10/30) than AI 0.5 (5/10).

So, trade between them would be : Betty selling its comparative advantage good Chocolate , AI selling its less comparative disadvantage good Candies.