Which manufacturing company has the comparative advantage for car parts?
| Company | 10 per hr. | 20 per hr. |
| --------- | ---------- | ---------- |
| Company A | 10 per hr. | 20 per hr. |
| Company B | 10 per hr. | 25 per hr. |
| Company C | 15 per hr. | 15 per hr. |
| Company D | 20 per hr. | 25 per hr. |
A. Company A
B. Company B
C. Company C
D. Company D
Answer (2)
Calculate the opportunity cost for each company by dividing the cost of car parts by the cost of the other product.
Company A: 20 10 = 0.5
Company B: 25 10 = 0.4
Company C: 15 15 = 1
Company D: 25 20 = 0.8
Identify the company with the lowest opportunity cost, which is Company B.
The company with the comparative advantage for car parts is C o m p an y B .
Explanation
Understanding the Problem The problem asks us to determine which company has a comparative advantage in producing car parts, given the cost per hour for each company to produce car parts and another product. The company with the lowest opportunity cost of producing car parts has the comparative advantage. The opportunity cost is the amount of the other product that could have been produced in the same amount of time.
Calculating Opportunity Costs To find the comparative advantage, we need to calculate the opportunity cost for each company. The opportunity cost is calculated by dividing the cost per hour for car parts by the cost per hour for the other product.
Company A's Opportunity Cost For Company A, the opportunity cost of producing car parts is 20 10 = 0.5 units of the other product per car part.
Company B's Opportunity Cost For Company B, the opportunity cost of producing car parts is 25 10 = 0.4 units of the other product per car part.
Company C's Opportunity Cost For Company C, the opportunity cost of producing car parts is 15 15 = 1 unit of the other product per car part.
Company D's Opportunity Cost For Company D, the opportunity cost of producing car parts is 25 20 = 0.8 units of the other product per car part.
Determining Comparative Advantage Comparing the opportunity costs, we see that Company B has the lowest opportunity cost (0.4 units of the other product per car part). Therefore, Company B has the comparative advantage in producing car parts.
Final Answer Therefore, the company with the comparative advantage for car parts is Company B.
Examples
Comparative advantage is a fundamental concept in economics that explains why countries or companies specialize in producing certain goods or services. For example, if Company B can produce car parts at a lower opportunity cost than other companies, it should focus on car parts production. This specialization leads to increased efficiency and overall economic benefits, as resources are allocated to their most productive uses. Understanding comparative advantage helps businesses make strategic decisions about what to produce and trade, leading to greater profitability and competitiveness.
The company with the comparative advantage in producing car parts is Company B, as it has the lowest opportunity cost of 0.4 other products per car part. This indicates that Company B forgoes the least amount of other products relative to the car parts it produces. Understanding opportunity cost helps companies make informed production decisions.
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