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One firm is better at producing everything than another

Suppose there are two goods, video cassettes and record albums, produced by firm A and firm B. Suppose the marginal rate of product transformation (RPT) of record albums for video cassettes in firm B is 2(That is, firm B can always trade 2 video cassettes for 1 record album in production). On the other hand, the RPT in firm A is 1. Assume that each firm's RPT is constant over all possible output combinations.

If firm A produces 100 record albums and 100 video cassettes, how might firm A be made better off by shifting its output mix?

Solution Preview

Initially, this appears to be an odd question because it gives us no information on the actions of B, only on the actions of A, and no information about the market (ie. price, demand, etc.). We also don't know how much each of ...

Solution Summary

This is one of those questions that requires thinking outside the box. In the answer I show how two firms can improve their well being even though there is no information about the market and no information about the actual production of one of the firms.

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