Tom and Jerry have two tasks to do all day: set traps and build bombs.If Tom spends all day setting traps,he will have set 16 traps.If he instead devotes his day to building bombs,Tom will build 4 bombs.If Jerry spends his day setting traps,he will set 14 traps;if he spends the day building bombs,he will build 7 bombs.Based on their production possibilities frontiers,Tom and Jerry:
A)can both benefit from trade because absolute advantage exists.
B)can both benefit from trade because comparative advantage exists.
C)cannot benefit from trade because Tom has the absolute advantage in both goods.
D)will not decide to trade because no comparative advantage exists.

Question

Quizplus · Accepted Answer

Comparative advantage exists when one producer can produce a good at a lower opportunity cost than another producer. Based on the given information, we can calculate the opportunity costs for Tom and Jerry for each good:

Opportunity cost of setting traps for Tom: 1 bomb/4 traps
Opportunity cost of building bombs for Tom: 4 traps/1 bomb
Opportunity cost of setting traps for Jerry: 1 bomb/2 traps
Opportunity cost of building bombs for Jerry: 2 traps/1 bomb

From this, we can see that Tom has a lower opportunity cost for both goods. However, Jerry has a comparative advantage in setting traps (lower opportunity cost) while Tom has a comparative advantage in building bombs (lower opportunity cost). Therefore, they can both benefit from trade. Tom can specialize in building bombs and trade with Jerry for traps, while Jerry can specialize in setting traps and trade with Tom for bombs. This will allow both of them to consume more of both goods than they would be able to produce on their own.

Tom and Jerry Have Two Tasks to Do All Day