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a. Suppose that Susan and Tom could buy or sell coffee beans and nuts in the world market at a price of $2 per pound for coffee beans and $2 per pound for nuts. If each person specialized completely in the good for which he or she had a comparative advantage, how much could they earn by selling all they produce (Tom's earnings plus Susan's earnings)?

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Answer:

 Susan and Tom's total earnings after selling all they produce is $96

Explanation:

Comparative advantage is a term that refers to an economy's ability to produce goods and services at a lower opportunity cost compared to other trade partners. A person can have comparative advantage at producing something if he/she can produce it at lower cost than anyone else.

  • Susan has comparative advantage in picking coffee beans, as she can pick 4 pounds of coffee beans in an hour.
  • Tom has comparative advantage in gathering nuts, as he can gather 4 pounds of nuts in an hour.

If each works 6 hours per day and if they both specialize according to their comparative advantage;

  • Susan can pick 4 × 6 = 24 pounds of coffee beans per day
  • Tom can pick 4 × 6 = 24 pounds of nuts per day

If they sell all they produce, in the world market, at a price of $2 per pound coffee beans and $2 per pound nuts, they can collectively earn;

  • (24 pounds of coffee beans × $2) + (24 pounds of nuts × $2) = $96

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