Self sufficient versus specialization-comparative advantage
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The manager of a financial planning business has 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?
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Solution Summary
This main objective of this post is to expain how the benefits of specialization work. The concepts covered in the post are relative advantage and absolute advantage. The concepts are explained for individuals but can be easily applied for evaluating the relative and absolute advantage for countries.
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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.
Francis has an absolute advantage in producing both products as he can produce more financial statements in an hour that that by Phil and he can answer more number of calls in an hour than that by Phil.
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