Question

The following data represent the production possibilities of two people in solving math and economics problems. If they devote their total effort and time to math, A can solve 10 math problems and B can solve 8 math problems. If they devote their total effort and time to economics, A can solve 10 economics problems and B 12 economics problems.

a) Assume that each will be self-sufficient and devote half their resources to math and half to economics. What is the outcome for both A and B in terms of math and economics problems solved?

b)Now assume that they specialize according to comparative advantage. How much math and economics will they produce together? What are the gains from trade?

Answer 1

Given:

	Maths	Economics
A	10	10
B	8	12

This can be shown in the graph below.

(a) If A devotes half his resources to Maths and half to Economics, then he can do 5 Maths questions and 5 Economics Questions.

Similarly, if B devotes half his resources to Maths and half to Economics, then he can do 4 Maths questions and 6 Economics Questions.

(b)

Comparative Advantage Table

	Cost of solving 1 Maths Question	Cost of solving 1 Economics Question
A	1 Economics Question	1 Maths Question
B	3/2 Economics Questions	2/3 Maths Question

Here, we see that the opportunity cost of A in solving Maths questions is less (=1 economics question in comparison to B's cost of 1.5 questions), while the opportunity cost of B is less for solving Economics questions (=2/3 Maths questions in comparison to A's cost of 1 question).

So, A specialises in solving Maths questions only, while B devotes all his time to Economics questions only.

Before specialisation:

Total Maths questions solved = A's + B's = 5 + 4 = 9

Total Economics questions solved = A's + B's = 5 + 6 = 11

After specialisation:

Total Maths questions solved = A's + B's = 10 + 0 = 10

Total Economics questions solved = A's + B's = 0 + 12 = 12

Comparison (Gains from Trade):

Increase in Maths solutions = 10 - 9 = 1

Increase in Economics Solutions = 12 - 11 = 1

Thus, we see that if both A and B specialise in their areas of Comparative Advantage, they end up solving more questions in total.The gains from trade are the higher number of questions that they could answer together, i.e., 1 for Maths and 1 for Economics.