Question

Susan can pick 4 pounds of coffee beans in an hour or gather 2 pounds of nuts. Tom can pick 2 pounds of coffee beans in an hour or gather 4 pounds of nuts. Each works 6 hours per day. Assume that Tom and Susan specialize according to their comparative advantage to produce coffee beans and nuts. a. Suppose that Susan and Tom could buy or sell coffee beans and nuts in the world market at a price of $2 per pound for coffee beans and $2 per pound for nuts. If each person specialized completely in the good for which he or she had a comparative advantage, how much could they earn by selling all they produce (Tom's earnings plus Susan's earnings)

Answer 1

Answer:

$96 per day

Explanation:

Competitive advantage refers to producing or doing something more efficiently than others. Susan has a competitive advantage in picking coffee beans as she can pick 4 pounds of coffee beans in an hour as compared to nuts which she can only pick 2 in an hour. She also has an advantage in picking coffee beans over Tom who can only pick 2 pounds of coffee beans while taking the same time as Susan do for 4 pounds.

Tom, on the other hand, has a competitive advantage in picking nuts as he can pick twice the amount of nuts than Susan can pick in an hour.

If both were to specialize in their competitive advantage,

• Susan can pick, 4 × 6 = 24 pounds of coffee beans per day
• Tom can pick, 4 × 6 = 24 pounds of nuts per day

So, if they sell their produces at the world market, they can collectively earn a total of $96 per day.

• Total Earning = 24 pounds coffee beans × $2 + 24 pounds of nuts × $2 = $96