10 Comparative advantage Caroline and Antonio are partners a

10. Comparative advantage Caroline and Antonio are partners at an architecture firm. They are trying to determine which of them has a comparative advantage in building the 25 models required for a sales pitch to a prospective client. Caroline can build 20 models per hour. For other activities, she can bill clients $400 per hour. Caroline\'s opportunity cost of building models is per model Antonio\'s opportunity cost of building models is 35% higher than Caroline\'s. However, as the junior partner, his billing rate is 30% lower. Based on all of these facts, has a comparative advantage in building models.

Solution

(i) Caroline\'s opportunity cost of building models is $20 per model (= $400/20).

(ii) Since comparative advantage depends only on relative opportunity costs, Caroline has comparative advantage on building models (since her opportunity cost is lower than Antonio\'s).