Question

The town of Chester has an economy composed entirely of two equally sized food companies. Both company Q and company R produce peanut butter and jam. Company Q is better at producing jam than Company R which is better at producing peanut butter. In order to maximize output Company R should
A. produce both jam and peanut butter on its own and sell its excess peanut butter to Company Z for additional jam B. reduce its production of peanut butter in order to commit resources to learn how to better produce jam
C. abandon the production of jam to fully specialize in the production of peanut butter and then trade with Company Q for jam

Answer 1

Answer:

C) abandon the production of jam to fully specialize in the production of peanut butter and then trade with Company Q for jam.

Explanation:

According to different theories about trade specialization, a company or even a country should specialize in producing only those products that they can make better than their competition, i.e. have a comparative or absolute advantage in their production.  

In this case, since Company R has a comparative advantage in the production of peanut butter, it should specialize in producing only that. In case they need jam, they should trade with Company Q in order to get some jam. Eventually Company Q  will only produce jam since they have a comparative advantage in jam production.