Final answer:
Paul should determine which product to specialize in by comparing his opportunity costs to Francisco's, focusing on where he holds a comparative advantage. Though the information provided does not support the claim of absolute advantage, Paul has the comparative advantage in shirt production, and Francisco has it in handbags, suggesting Paul should specialize in shirts.
Step-by-step explanation:
In determining whether to produce shirts, handbags, or both, Paul needs to consider his opportunity costs and which good he has a comparative advantage in producing. Paul has an absolute advantage in the production of both shirts and handbags because he can produce them at a lower cost than Francisco, which is not factually supported by the information provided. To decide which good to specialize in, Paul should compare his opportunity costs with Francisco's. Paul's opportunity cost for producing one shirt is 1/2 of a handbag, while Francisco's opportunity cost for one shirt is a whole handbag. Similarly, Paul's opportunity cost for one handbag is two shirts, whereas for Francisco, it's just one shirt.
The concept of comparative advantage implies that an individual has a comparatively lower opportunity cost in the production of a good relative to others. In this case, because Paul has a lower opportunity cost in producing shirts (1/2 handbag versus 1 handbag for Francisco), he has the comparative advantage in shirt production. Likewise, Francisco has a comparative advantage in producing handbags since his opportunity cost (1 shirt) is lower than Paul's (2 shirts). Based on these data, Paul should specialize in producing shirts where he has the comparative advantage and potentially trade with Francisco for handbags.