PROBLEM #4 Mark and Larry have skills in professional moving and painting. In on

Question

PROBLEM #4 Mark and Larry have skills in professional moving and painting. In one day, Mark can move 80 boxes, if he spends the whole day painting, he can paint 4 rooms. In one day, Larry can move 60 boxes; if he spends the whole day painting, he can paint 2 rooms. a. Who has the absolute advantage in making moving boxes and who has the absolute advantage in painting rooms? b. Who has the comparative advantage in each activity? Show your derivations. c. According to the principle of comparative advantage, in which activity should each person (Mark and Larry) specialize in order to gain from trade?

Explanation / Answer

a) While the absolute advantage require lower labour requirement implying that with the same labour resource the entity with absolute advantage is able to produce more relative to others. In comparative advantage the entity with lower opportunity cost in production of a good tends to have the comparative advantage in its production. I

n the given case Mark is able to move 80 boxes in one day while Larry can move only 60 boxes. Similarly Mark can paint 4 rooms while Larry can paint only 2 rooms. Since Mark is able to move more boxes and paint more rooms than Larry, Mark has absolute advantage in both moving boxes and painting rooms

b) The opportunity cost is the amount of other good not produced when all the resources are used in the production of one good. The opportunity cost of moving one box for Mark is 4/80 = 0.05 rooms while the same for Larry is 2/60 = 0.03 rooms. Therefore Larry as comparative advantage in moving boxes because its opportunity cost is lower. Mark has a lower opportunity cost of painting rooms and so it has comparative advantage in painting rooms.

c) According to the principles of comparative advantage and create one should specialize in an activity in which he has comparative advantage. Therefore Larry should specialise in moving boxes and Mark should specialise in painting rooms.

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