The table below provides an hourly production information for two Bob and Joe. T

Question

The table below provides an hourly production information for two Bob and Joe. They can produce smoothies and salads. Suppose Bob’s customers, like Joe’s customers, buy smoothies and salads in equal quantities. (a) How much should Bob and Joe produce of each good per hour? (b) Who has a comparative advantage in producing smoothies? (c) Who has a comparative advantage in producing salads? (d) What is the total or combined production of each good if they specialize based on comparative advantage? (e) What is the lesson for managers?

Smoothie

Salad

Bob

2 minutes

2 minutes

Joe

10 minutes

2 minutes

Smoothie

Salad

Bob

2 minutes

2 minutes

Joe

10 minutes

2 minutes

Explanation / Answer

(a) Output table for 1 hour is as follows.

(b) Let us compute Opportunity cost as follows.

Bob's OC of smoothies = 30/30 = 1 salad

Joe's OC of smoothies = 30/6 = 5 salad

Since Bob can produce smoothies at a lower OC than Joe can (1 < 5), Bob has comparative advantage in smoothies.

(c) Correspondingly, Joe has comparative advantage in salad.

(d) If they specialize, Bob will produce only smoothies and Joe will produce only salad.

Production of smoothies = 30

Production of salad = 30

NOTE: As per Answering Policy, first 4 parts have been answered.

Smoothie Salad Bob 60/2 = 30 60/2 = 30 Joe 60/10 = 6 60/2 = 30

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