Question

The town of Franklin has an economy composed entirely of two equally sized specialized tire manufacturers. Both company X and company Z produce race car tires and airplane tires. Company X is better at producing race car tires than Company Z which is better at producing airplane tires. In order to maximize output, Company X should:_________
a. reduce its production of race car tires in order to commit resources to learn how to better produce airplane tires.
b. abandon the production of airplane tires to fully specialize in the production of race car tires and then trade with Company Z for airplane tires.
c. keep producing both products at the going rate.
d. produce both race car tires and airplane tires on its own and sell its excess race car tires to Company Z for additional airplane tires.

Answer 1

Answer:

b. abandon the production of airplane tires to fully specialize in the production of race car tires and then trade with Company Z for airplane tires.

Explanation:

Company X has a comparative advantage at producing race car tires

Company Z has a comparative advantage at producing airplane tires.

A country (company) has comparative advantage in production if it produces at a lower opportunity cost when compared to other countries (companies).

A company should specialise only in the production of the good for which it has a comparative advantage.

Company X should specialise in producing race car tires and stop producing airplane tires

Company Z should specialise in producing airplane tires and stop producing race car tires