In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps

Question

In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps or 7 jackets. Sue's opportunity cost of producing a cap isjackets and Tessa's opportunity cost of producing a cap is jackets has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage, OA 0.2;0.10, Tessa; Tessa gains but Sue loses CB. 5.0; 10.0; Sue, both Sue and Tessa gain OC. 0.2;0.10; Tessa; both Sue and Tessa gain OD. 5.0;10.0; Tessa; Sue loses but Tessa gains OE. 0.2;0.10; Sue; Tessa gains but Sue loses

Explanation / Answer

Sue's opportunity cost (OC) of 1 cap = 10/50 = 0.2 jackets

Tessa's OC of producing 1 cap = 7/70 = 0.1 jackets

Since Tess can make caps at a lower OC, Tessa has comparative advantage in caps.

When they specialize in producing the good in which each has a comparative advantage, both of them benefit from trade.

So correct option is (C).

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