Tom and Jerry have two tasks to do all day: make dishes and build fences.If Tom spends all day making dishes,he will have make 16 dishes.If he instead devotes his day to building fences,Tom will build 4 fences.If Jerry spends his day making dishes,he will make 14 dishes; if he spends the day building fences,he will build 7 fences.Based on their production possibilities frontiers,Tom and Jerry:
A) can both benefit from trade because absolute advantage exists.
B) could 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

Tom has an absolute advantage in making dishes since he can make 16 in a day compared to Jerry's 14. However, Jerry has a comparative advantage in making dishes since his opportunity cost of producing 1 dish is 0.5 fences (he can make 7 fences if he spends the day building fences). Meanwhile, Tom's opportunity cost of producing 1 dish is 4 fences. This means that Jerry can produce dishes at a lower opportunity cost than Tom. Therefore, if they specialize in their comparative advantage and trade with each other, they can both benefit and increase their overall output. Tom should focus on building fences while Jerry should focus on making dishes, and they can exchange some of their output with each other.

Tom and Jerry Have Two Tasks to Do All Day