Question

Tom can solve 10 math problems or write 2 short stories in an hour. Susan can solve 15 math problems or write 2 short stories in an hour. Assuming each person produces correct math solutions and stories of equally quality, answer the questions below. Make sure to explain your reasoning.

A. Explain who has an absolute advantage and in what product?
B. Explain whether or not there is any basis for trade between Tom and Susan? Who should produce what?
C. Explain how can Susan gain anything in trading with Tom?

Answer 1

a) Susan can solve 15 math questions at a time so she have a absolute advantage in solving questions and both the students can write the same number of stories so there is no absolute advantage in that.

b) Yes, there is a basis of trade between the both. The opportunity cost of Tom solving a math question is 10/2 = 5 question per story and for Susan it is 15/2 = 7.5. As the opportunity cost of tom writing a story is less.He will write stories and Susan will solve Maths questions.

c) Tom will gain as long as he is receiving more than 5 questions for a story and Susan can gain as long as she is writing less than 7.5 questions for a story. they both will gain if they are exchanging 6 questions for a story.