In one hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps

Question

In one hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps or 4 jackets. Sue's opportunity cost of producing a caps Jackets and Tessa's opportunity cost of producing a cap isjackets has a comparative advantage in producing caps. If Sue and Tessa specialize in producing the good in which they have a comparative advantage,- O A. Sue: Tessa gains but Sue loses O B. Tessa; Sue loses but Tessa gains OC. Tessa; both Sue and Tessa gain 0 D. Sue; both Sue and Tessa gain O E. Tessa; Tessa loses but Sue gains

Explanation / Answer

Ans:

Option C

Tessa;  both sue and Tessa gain.

comparative advantage is the advantage of a country to produce a good at a lower opportunity cost than another country.

For sue to produce 1 unit of cap, it has an opportunity cost of 0.1 jackets .i.e(4/40)

For Tessa to produce 1 unit of cap, it has an opportunity cost 0.05 jackets .i.e(4/80)

Since the opportunity is lower for Tessa, Tessa has comparative advantage in producing caps.

If Tessa and sue both specialize in producing the goods in which they have a comparative advantage both sue and Tessa gain.

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