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? Be sure to show your work.
dP/df=1 dFr/df=4
dP/dt=4 dFr/dt=10
So, the value of these services has to be established: Let the value of a telephone call be Vt, and the Value of a financial statement Vf.
So the possible total values in one hours could be:
phil f, Fr t: Vf+8Vt
phil f, Fr f: 5Vf
phil t, Fr f: 4Vf+8Vf
phil t, Fr t: 18Vf
Now if you put in numbers for the two values, you get your answers. For instance, if the value of a statement is 10 dollars, and the value of answering a telephone call 20 dollars, then value of the options are..
100, 50,200, 390 and the answer is they both work the telephones to max value.
To determine if either person has an absolute advantage in producing both products, we need to compare the productivity of Phil and Francis in terms of producing financial statements and answering phone calls.
Let's first compare their productivity in producing financial statements:
- Phil can produce 1 financial statement in 1 hour.
- Francis can produce 4 financial statements in 1 hour.
Since Francis can produce more financial statements in the same amount of time, he has an absolute advantage in producing financial statements.
Now, let's compare their productivity in answering phone calls:
- Phil can answer 8 phone calls in 1 hour.
- Francis can answer 10 phone calls in 1 hour.
Similarly, Francis can answer more phone calls in the same amount of time, so he has an absolute advantage in answering phone calls.
Based on the analysis of their productivity, it would be more beneficial for Phil and Francis to specialize in their respective tasks. Phil can specialize in answering phone calls since he has a higher productivity in that area. Francis, on the other hand, can specialize in producing financial statements since he has a higher productivity in that area.
By specializing, Phil and Francis can maximize their productivity and efficiency, resulting in a higher overall output for the financial planning business. Additionally, specializing allows each of them to focus on tasks that they are particularly skilled at, leading to higher quality work.