Question

Consider two individuals, Tanck and Kalene each of whom knits sweaters and makes hotdogs, respectively. The gains from trade between Tank and Kalene are most obvious in which of the following cases?

a. Tanek is very good at knitting sweaters and at making hotdogs, but alene's skills in both of these activities are very poor
b. Tanek's cooking and knitting skills are very poor, and Kalene's cooking and krutting skills are also very poor
c. Tanek's skills are such that he can only knit sweaters, and Kalene's skills are such that she can only make hotdogs.
d. Tanek and Kalene both are very good at making hotdogs, but neither has the necessary skills to knit sweaters

Answer 1

The most obvious gains from trade between Tanck and Kalene occur in option c, where each specializes in a different good, demonstrating the principle of comparative advantage.

Step-by-step explanation:

The question asks which scenario demonstrates the most obvious gains from trade between two individuals, one named Tanck and the other named Kalene, each with skills in knitting sweaters and making hotdogs. The theory of comparative advantage addresses such scenarios by suggesting that trade can benefit all parties involved if they specialize in the production of goods for which they have the least productivity disadvantage compared to others. In other words, each party should focus on producing the goods that they are relatively better at compared to the other party.

The correct answer to the question is option c: Tanck's skills are such that he can only knit sweaters, and Kalene's skills are such that she can only make hotdogs. This situation creates the most obvious gains from trade since each individual specializes in one activity and can trade their surplus with the other party. Through specialization, each individual can benefit from the other's efficiencies. Thus, Tanck and Kalene can each enjoy both goods by trading with one another, despite each being able to produce only one type of good.

Options a, b, and d do not show the most obvious gains from trade. In a and d, both individuals are skilled at the same task (either both are skilled or both are unskilled), which does not create a strong basis for trade. In option b, both are very poor at the tasks, also not yielding clear comparative advantages.