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Absolute and Comparative Advantage

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As a manager of a financial planning business you have two financial planners, Phil and Francis. In an hour, Phil can produce either one financial statement or answer 8 phone calls, while Francis can either produce 4 financial statements or answer 10 phone calls.

Does either person have an absolute advantage in producing both products?

Should these two planners be self-sufficient (each producing statements and answering phones) or specialize?

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Solution Summary

Solution explains the steps to determine whether a person has absolute advantage in production of each of the products. It also determines whether they should specialize or not.

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Production per hour
Financial Statements Phone Calls
Phil 1 8
Francis 4 10

Francis has an absolute advantage in producing both products as he can produce more financial statements in an hour than that by Phil and he can answer more number of calls in an hour than that by Phil.

Let us analyze the opportunity costs involved.

For Phil;
Opportunity cost of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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