David takes 10 minutes to process a customer, and 20 minutes to stock the shelves. Danny
takes 15 minutes to process a customer, and 15 minutes to stock the shelves. Which of the
following statements is true?
a. David has an absolute advantage in performing both tasks.
b. Danny has an absolute advantage in performing both tasks.
c. David has a comparative advantage in processing customers but not in stocking shelves.
d. Danny has a comparative advantage in processing customers but not in stocking shelves.
e. Danny has a comparative advantage in processing customers and in stocking shelves.
Explain and show working out
c. David has a comparative advantage in processing customers but not in stocking shelves.
To determine comparative advantage, we must calculate the opportunity cost for each task for each individual. The opportunity cost is the value of the next best alternative that must be given up in order to perform the task.
For David:
- Processing a customer: 1 customer processed in 10 minutes = 1/10 customer per minute. The opportunity cost of processing a customer is therefore stocking shelves, which takes 20 minutes for David to do. In 20 minutes, David could stock 20/20 = 1 shelf, so the opportunity cost of processing one customer is 1 shelf.
- Stocking shelves: 1 shelf stocked in 20 minutes = 1/20 shelf per minute. The opportunity cost of stocking shelves is processing customers, which takes 10 minutes for David. In 10 minutes, David could process 10/10 = 1 customer, so the opportunity cost of stocking one shelf is 1 customer.
For Danny:
- Processing a customer: 1 customer processed in 15 minutes = 1/15 customer per minute. The opportunity cost of processing a customer is stocking shelves, which takes 15 minutes for Danny. In 15 minutes, Danny could stock 15/15 = 1 shelf, so the opportunity cost of processing one customer is 1 shelf.
- Stocking shelves: 1 shelf stocked in 15 minutes = 1/15 shelf per minute. The opportunity cost of stocking shelves is processing customers, which takes 15 minutes for Danny. In 15 minutes, Danny could process 15/15 = 1 customer, so the opportunity cost of stocking one shelf is 1 customer.
Comparing the opportunity costs, we see that David's opportunity cost of processing a customer is lower (1 shelf vs. 1 customer) than Danny's, indicating that David has a comparative advantage in processing customers. However, Danny's opportunity cost of stocking shelves is lower (1 customer vs. 1 shelf) than David's, indicating that Danny has a comparative advantage in stocking shelves.