This activity will demonstrate comparative advantage and how it relates to profit.
Kristin and Anna live in the beach town of Santa Monica. They own a small business in which they make wristbands and pot holders and sell them to people on the beach. As shown in the table below, Kristin can make 50 wristbands per hour, but only 40 potholders. Anna can make 55 wristbands or 35 potholders in an hour.
Wristbands Potholders
Kristin 50 40
Anna 55 35
a) For Kristin and Anna, what is the marginal rate of transformation (opportunity cost) of a potholder? Who has the comparative advantage in potholders and wristbands? Explain.
b) Assume that Kristen works 40 hours a week in the business. Assuming Kristin is in business on her own, graph the possible combinations of pot holders and wristbands that she could produce in a week.
c) Suppose that Kristen and Anna can sell all their wristbands for $3 and potholders for $4.20. If each of them worked 40 hours per week, how should they split their time between wristbands and pot holders? What is the maximum joint revenue? Repeat this part with prices of $4 for wristbands and $4.20 for potholders.
d) What implications does your answer to question 4 have for business managers and their employees?