Question

Tom can solve 10 math problems or write 2 short stories in an hour. Susan can solve 15 math problems or write 2 short stories in an hour. Assuming each person produces correct math solutions and stories of equally quality, answer the questions below. Make sure to explain your reasoning.

a. Explain who has an absolute advantage and in what product?
b. Explain whether or not there is any basis for trade between Tom and Susan? Who should produce what?
c. Explain how can Susan gain anything in trading with Tom?

Answer 1

1. Susan has an absolute advantage in solving maths problem because she can solve 15 problems in an hour in comparison to Tom who can solve only 10 in the same time. None has absolute advantage in writing stories because both can write 2 stories in an hour.
2. If we consider a comparative advantage then there is a possibility to trade between them.

To solve 1 maths problem Tom will have to give up 0.2 part of a story while Susan will have to give up 0.13 part of the story. So Susan has comparative advantage in solving maths problems.

Again to write 1 story Tom gives up 5 maths problems while Susan gives up 7 maths problems. Hence Tom has comparative advantage in writing stories.

Hence Tom should write story in exchange for maths problems.

C. By trading Susan shall gain 2 stories from Tom using the comparative advantage argument.