Question

The town of Chester has an economy composed entirely of two equally sized food companies. Both company Q and company R produce peanut butter and jam. Company Q is better at producing jam than Company R which is better at producing peanut butter. In order to maximize output Company R should O produce both jam and peanut butter on its own and sell its excess peanut butter to Company Z for additional jam O reduce its production of peanut butter in order to commit resources to learn how to better produce jam O abandon the production of jam to fully specialize in the production of peanut butter and then trade with Company Q for jam

Answer 1

Ans) the correct option is abandon the production of jam to fully specialise in the production of peanut butter and then trade with company Q for jam.

Company should produce that good in which it has specialisation or is best at production. Specialisation occurs when it has lower opportunity cost in producing the good.