In: Economics
a) A country is said to have an absolute advantage if the country can produce a good at a lower cost than another. Spain can produce both the goods at a lower cost than Italy. Spain produces 1200 pounds of olive or 1600 pound of tomatoes both of which are more than the what is produced in Italy. So Spain has absolute advantage in both the goods.
b) Comparative advantage is when the opportunity cost of producing the good is less than other countries. In case of olives , Spain has to forgoe 1600 pounds of tomatoes for 1200 pound of olive . So opportunity cost of 1 pound of olive is 1600/1200 or 4/3 pound of tomatoe. Similarly for Italy , opportunity cost of 1 pound of olive is 800/800 or 1 pound of tomatoe
So Italy has a lower opportunity cost in olives and hence would produce olives . SImilarly Spain has a lower opportunity cost in tomatoes ie 3/4 and Italy a higher opportunity cost. So Spain produces tomatoes.
c) If Italy decides to increase production of olives by 800 , the total would be 1600 pound of olive and now the comparative advantage of producing olives would be with Italy because now the opportunity cost of producing olives is less .
Italy produces 1600 pounds of olive or 800 pound of tomatoes . So 1 pound of olive is produced at sacrificing 1/2 pound of tomnatoes while 4/3 is opportunity cost is for Spain . So now Italy produces olive and Spain tomatoes.
In other case if instead 600 more tomatoes are to be produced , then total 1400 tomatoes would be produced and opportunity cost would be 800/1400 or 4/7 which is lower than of Spain . So in this case Italy would produce tomatoes and Spain olives because Italy has comparative advantage in tomatoes.
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