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?

a. Company output will be maximized if Calvin makes all the decals and Hobbes makes all the chains. b. Calvin has a comparative advantage for making decals. c. Hobbes has a higher opportunity cost for making decals than Calvin.
d. Company output will be maximized if Calvin and Hobbes both divide their time equally between making decals and making chains

Answer 1

Correct statements: A, B, C

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

If they each focus on the skill they are most efficient at, production will be higher.

B. Calvin has a comparative advantage for making decals.

A comparative advantage is being able to do an activity better or more efficiently than someone else. Calvin's comparative advantage is that he is faster than Hobbes at making decals.

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

Because Hobbes is more efficient at chains, he is giving up the opportunity to produce at maximum efficiency if he decides to make decals instead. The lost production is the opportunity cost.