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Absolute 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 2 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? Be sure to show your work.

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Solution Summary

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 2 financial statements or answer 10 phone calls. Does either person have an absolute advantage in producing both products?

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Francis has absolute advantage in producing both the projects. He can not only produce more financial statements but can also answer more phone calls in an hour as compared to Phil.

It is advisable that both should specialize in order to provide greater benefit to the organization. By specializing, the combined effort of Phil and Francis would yield greater productivity to the organization. Let us see the calculations.

Francis' absolute advantage in terms of producing ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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