Question

A company has two plants, both of which can manufacture golf clubs and golf balls. Plant A can produce 100 clubs per day; Plant B can produce 40. Plant A can produce 100 dozen balls per day; Plant B can produce 80.

A.Which plant has an absolute advantage in clubs? In balls?

B.Which plant has a comparative advantage in clubs? In balls?

C.Which plant should produce clubs and which should produce balls, or should both plants produce both? Most importantly, why?

Answer 1

A) Doe absolute advantage we only have to find out the more productive plant.

Thus Plant A produce more Clubs thus plant A has absolute advantage.

Plant A can produce more balls then B, thus plant A has absolute advantage in balls as well.

B)opportunity cost of Club in plant A=100/100=1ball

Opportunity cost of Clubs in plant B=80/40=2balls.

Thus plant A has comparative advantage in Club and plant B has comparative advantage in Balls.

C) according to comparative advantage theory, plant should produce that commodity in which it has comparative advantage.

plant A should produce Clubs and plant B should produce Balls leading to full specialisation and leads to benefit for both.