Question

Calvin and Hobbes run a company that sells wallet chains and wallet decals. Calvin is faster at making decals than chains, and Hobbes is faster at making chains than decals. Which statements accurately describe the situation?

Answer 1

Answer:

Company output will be maximized if Calvin makes all the decals and Hobbes makes all the chains.

-Calvin has a comparative advantage for making decals.

-Hobbes has a higher opportunity cost for making decals than Calvin.

Explanation: Each partner should focus on the task where he has a comparative advantage.

In the situation of Calvins: if someone has a comparative advantage in producing something, that means he also has a lower opportunity cost in practicing that object.

In the situation of Hobbes: if he has a higher opportunity cost for making decals, then Calvin has a lower opportunity cost for making decals.

Answer 2

Answer:

The correct answers are letters "A", "B", and "C".

Explanation:

Comparative advantage is the advantage an individual, company or country has that allows them to produce at lower opportunity cost compared to rivals. It does not necessarily mean that they have an absolute advantage. Due to lower opportunity costs, a company can offer its products at lower prices generating more revenue.

In the case, as Hobbes is faster at making chains, Hobbes has a comparative advantage on chains over Calvin. Though, as Hobbes is slower in making decals, Hobbes has higher opportunity costs than Calvin on decals. In such a way, Calvin has a comparative advantage in making decals.

Therefore, the chains and decals output would be maximized if Calvin makes decals only and Hobbes makes chains only.