Question

Shen and Valerie run a catering business in which they have two major tasks: getting new clients and preparing food for events and parties. It takes Shen 10 hours to prepare the food for an event and 5 hours of effort to get each new client. For Valerie, it takes 12 hours to prepare food for an event and 3 hours to get a new client.
A) In this scenario, ______ has an absolute advantage in food preparation,and _______ has a comparative advantage in food preparation.
Suppose that initially Victor and Crystal are both doing both tasks. Then they decide to start shifting some work according to the principle of comparative advantage. In particular, the person with the comparative advantage in food preparation will take over preparing food for one more event, and the other person will use the freed-up time to get more clients. As a result, the total number of events for which food is prepared will remain unchanged, but the number of new clients will increase by _________.

Answer 1

Answer:

Shen : Absolute & Comparative Advantage in Food Preparation

Valerie : Absolute  & Comparative Advantage in getting New Client

Shifting one unit of production as per comparative advantage will get 4 more clients.

Explanation:

Absolute Advantage is when one person/ country can produce a good with less input (material / time) than other person/ country

Comparative Advantage : One person/ country can produce a good relatively more efficiently than other good, compared to other person/ country

              Food           Client    

Shen        10                5            

Valerie      12               3            

Shen takes less time in preparing food than Valerie (10 < 12) ; Valerie takes in getting client than Shen (3 < 5). So, Shen has absolute advantage in Food & Valerie in getting Client .

Shen is more efficient (1/2 productive) in food than client, compared to Valerie (1/4th productive). Valerie is more efficient (4X productive) in client than food, compared to Shen (2X productive). So, Shen has comparative advantage in preparing food & Valerie in getting client.

Hence, Shen will prepare one more unit of food. This will save 12 hours of Valerie food preparation & she will get 4 more clients.