Question

Suppose Damian is deciding whether or not to merge his firm with Jill or to continue working on his own. He says he shouldn't work with her because she can't make as many windows or doors as him. Explain to him why he is right or wrong using graphical or mathematical evidence.

Damian: 10 windows, 0 doors or 5 doors, 0 windows

Jill: 8 windows, 0 doors or 0 windows, 2 doors

Answer 1

Given the number of doors and windows produced by Damian and Jill, clealry Damian has an absolute majority in the production of both Windows and doors i.e. Damian can produce 10 windows and 0 doors, while Jill can produce 8 windows and no doors. Similarly, Damian can produce 5 doors and no windows, while Jill can only produce 2 doors and no windows.

However, Damian can gain from merging with Jill. This is because Damian can specialize in Door production, and thus produce 5 doors, and Jill can specialize in Window production,a nd thus produce 8 windows.

In this way, the economy will have more Windows and Doors than if Damian produced both.

(This is because Damian's opportunity cost of Door production = 2 windows per door and Jill's opportunity cost of Door production = 4 windows per door. Thus, Damian should specialize in Door production based on his comparative advantage).