Question

Ginny and Eric are partners at an architecture firm. They are trying to determine which of them has a comparative advantage in building the 25 models required for a presentation to a prospective client. Ginny can build 20 models per hour. For other activities, she can bill clients $400 per hour. Ginny’s opportunity cost of building models is per model. Eric’s opportunity cost of building models is 35% higher than Ginny’s. Therefore, has a comparative advantage in building models.

Answer 1

Answer: (i) $20 per model

(ii) $27 per model

(iii) Ginny has a comparative advantage in building models.

Explanation:

A country or a firm has a comparative advantage in producing a commodity if the opportunity cost of producing that commodity in terms of other commodities is lower than the other country or firm.

Opportunity cost is the benefit that is foregone for an individual by choosing one alternative over other alternatives available to him.

If the opportunity cost is lower for an individual then this will benefit him whereas if the opportunity cost is higher then this will not benefit the individuals.

Therefore,

Ginny's Opportunity cost of producing one model = $\frac{400}{20}$

                                                                                      = $20 per model

Eric’s opportunity cost of building models = $20 + 35% of $20

                                                                      = $20 + $7

                                                                      = $27 per model

Hence, Ginny has a comparative advantage in building models because Ginny's opportunity cost of building model is lower than Eric's opportunity cost.