Tom can solve 10 math problems or write 2 short stories in an hour. Susan can solve 15 math problems or write 2 short stories in an hour. Assuming each person produces correct math solutions and stories of equally quality, answer the questions below. Make sure to explain your reasoning. a. Explain who has an absolute advantage and in what product? b. Explain whether or not there is any basis for trade between Tom and Susan? Who should produce what?

c. Explain how can Susan gain anything in trading with Tom?

Answer: A) The absolute advantage is the ability of a person, company or country to produce a good, having to use less production factors than another. Therefore Susan has an absolute advantage in math.

B) The basis for trade between Susan and Tom is that Susan should devote herself to specializing in solving math problems since she is more efficient at it, and Tom must write stories.

C) First the opportunity costs must be taken into account:

For Susan 7.5 mathematical problems = 1 story.

For Tom 5 math problems = 1 story

In this way Tom has the possibility of changing Susan 1 story for between 5 and 7.5 math problems and if Susan changes 6 math problems for 1 story.

Susan would have 9 math problems and 1 story which she wouldn't be able to get by herself.