Final answer:
The correct specialization based on comparative advantage is for Sandy to focus on economics reports and for Tim to specialize in sales calls. This will yield better overall productivity, as each person focuses on the task they are relatively more efficient in performing.
Step-by-step explanation:
Given Sandy's ability to produce 10 economics reports or make 2 sales calls, and Tim's ability to produce 2 economics reports or make 1 sales call, we should look to the concept of comparative advantage to determine their specializations. Sandy's opportunity cost of making a sales call is 5 economics reports, while Tim's is 2 economics reports. Therefore, Sandy has a comparative advantage in producing economics reports, while Tim has a comparative advantage in making sales calls, even though Sandy has an absolute advantage in both activities.
According to the theory of specialization of labor, each individual should specialize in the task where they have a comparative advantage. Specialization allows individuals to focus on what they are more productive at relative to other tasks. This is explained through the examples where professionals maximize their income by applying their skills to the tasks they perform best.
On this basis, the correct answer is: Sandy should specialize in economics reports, and Tim should specialize in sales calls. By specializing and possibly trading their services, they can both benefit from increased overall productivity compared to if they tried to be self-sufficient.