Question

Two students are assigned to work together on a project that requires both writing and an oral presentation. Steve can write 1 page or prepare 3 minutes of a presentation each day. Anna can write 2 pages or prepare 1 minute of a presentation each day. [LO 2.2] a. Who has a comparative advantage at writing? b. Suppose that Steve goes to a writing tutor and learns some tricks that enable him to write 3 pages each day. Now who has a comparative advantage at writing?

Short answer

a. Anna has a comparative advantage at writing. b. Anna still has a comparative advantage at writing.

Step-by-step solution

Define Comparative Advantage

Comparative advantage occurs when an individual or entity can produce a good or service at a lower opportunity cost than others. In this context, the opportunity cost of writing pages is given by how much oral presentation time they sacrifice to write one more page.

Calculate Steve's Initial Opportunity Cost

Initially, Steve can either write 1 page or prepare 3 minutes of a presentation each day. Therefore, to write 1 page, Steve sacrifices 3 minutes of a presentation. His opportunity cost of writing 1 page is 3 minutes of presentation time.

Calculate Anna's Initial Opportunity Cost

Anna can write 2 pages or prepare 1 minute of presentation each day. Therefore, to write 1 page, Anna sacrifices \(\frac{1}{2}\) minutes of a presentation. Her opportunity cost of writing 1 page is 0.5 minutes of presentation time.

Compare Opportunity Costs for Initial Scenario

Comparing the opportunity costs calculated, Anna (0.5 minutes) has a lower opportunity cost for writing 1 page compared to Steve (3 minutes). Thus, Anna initially has a comparative advantage in writing.

Update Steve's Writing Capacity

After receiving tutoring, Steve now writes 3 pages each day. Therefore, his opportunity cost for writing 1 page becomes \(\frac{3}{3} = 1\) minute of presentation per page.

Compare Updated Opportunity Costs

With Steve now having an updated opportunity cost of 1 minute and Anna's opportunity cost remaining at 0.5 minutes per page, Anna still has a lower opportunity cost and maintains a comparative advantage in writing.

Key concepts

Opportunity Cost

Opportunity cost is a fundamental concept in microeconomics that helps us understand the trade-offs we make when choosing between different options. It refers to the value of the next best alternative that we forego when we make a decision. In other words, it's what we give up to pursue a particular action. In the context of Steve and Anna working on their project, opportunity cost is highlighted in their choice between writing and preparing a presentation.

For instance, Steve's opportunity cost for writing one page is the 3 minutes he could have spent preparing a presentation. Meanwhile, Anna's opportunity cost is only 0.5 minutes lost of presentation time per page written. This concept is crucial when determining who has the comparative advantage, as the one with the lower opportunity cost will typically take on the task for which they are more efficient.

Production Possibilities

The production possibilities evaluated in this exercise focus on how much work Steve and Anna can accomplish in a day using their respective abilities. The production possibilities curve (PPC) is a model used to illustrate the trade-offs between two different goods or services that can be produced, given limited resources.

For Steve, his initial production possibilities are either 1 page or 3 presentation minutes per day. After tutoring, his production changes to 3 pages or potentially fewer presentation minutes. Anna, on the other hand, can produce either 2 pages or 1 minute of presentation per day. This shows their maximum production capacity for these tasks. Understanding these upper limits helps to allocate their time more efficiently and explore who should focus on which task.

Microeconomics

Microeconomics deals with the behavior of individuals and small organizations in making decisions on the allocation of limited resources. It provides a framework to understand the decisions made by Steve and Anna and how they should optimize their project work based on their respective skills and limitations.

By calculating the opportunity costs and understanding their production possibilities, each student applies microeconomic principles to make informed choices on how to allocate their time between writing and preparing the presentation. This not only helps in achieving the best outcome for their project but also maximizes the use of their skills, portraying an example of efficient decision-making in economics.

Resource Allocation

Resource allocation is about distributing available resources in a way that achieves the maximum possible benefit or outcome. In Steve and Anna's case, the resources are their time and abilities in writing and preparing presentations.

Given their strengths and opportunity costs, the goal is to distribute their tasks so that they can complete the project efficiently. Since Anna has a comparative advantage in writing due to her lower opportunity cost, it would be more beneficial for her to focus on writing more pages. Meanwhile, Steve might improve productivity by focusing on preparing the presentation if he has a comparative advantage in that aspect or relatively improves efficiency after learning new skills.

• Determine who will perform specific tasks based on their comparative advantages
• Ensure time is used optimally to complete the project effectively

By focusing on their comparative strengths, Steve and Anna can achieve their project goals with efficient resource allocation.