Suppose Sam and Kevin can produce pens and pencils as shown in the table below. PensPencilsSam12 hours8 hoursKevin4 hours6 hours(a) Who has a comparative advantage in producing pens? Who has a comparative advantage in producing pencils?(b) Suppose Sam and Kevin have to each give Flip, a common friend, 10 pens and 10 pencils. Is there a trade that will make both of them better off? If a trade that would make both of them better off exists, describe such a trade. If there is no such trade that would make both of them better off, explain why.

Question

What will be an ideal response?

Answer 1

(a) Kevin has a comparative advantage in producing pens because he has to give up only 2/3 of a pencil to make a pen. Sam would have to give up 12/8 = 3/2 pencils to make a pen.
(b) Yes, trade can make them both better off. Sam has a comparative advantage in producing pencils because he has to give up only 8/12 = 2/3 pens to make a pencil. Kevin would have to give up 6/4 = 3/2 pens to make a pencil. There is likely to be potential gains from trade if Kevin specializes in production of pens and Sam specializes in pencils. Kevin could exchange 10 pens for 10 pencils with Sam.