Fab Tools Inc.can produce 150 widgets and 100 axes in a month.Another company AllMyTools Inc.can produce 180 widgets and 50 axes per month.Which of the following statements is true?
A)Fab Tools has a comparative advantage in the production of widgets.
B)Fab Tools has an absolute advantage in the production of both goods.
C)AllMyTools has a comparative advantage in the production of widgets.
D)AllMyTools has an absolute advantage in the production of both goods.

Question

Quizplus · Accepted Answer

Comparative advantage refers to the ability of a country to produce a particular good or service at a lower opportunity cost compared to another country. In this scenario, Fab Tools can produce 1 widget for every 2/3 axes (150/100), while AllMyTools can produce 1 widget for every 2.78 axes (180/50). This implies that Fab Tools has a lower opportunity cost of producing axes, whereas AllMyTools has a lower opportunity cost of producing widgets. Therefore, AllMyTools has a comparative advantage in the production of widgets.