Marissa and Steve are partners at an architecture firm. They are trying to deter

Question

Marissa and Steve are partners at an architecture firm. They are trying to determine which of them has a comparative advantage in building the 50 models required for a sales pitch to a prospective client. Marissa can build 10 models per hour. For other activities, she can bill clients $500 per hour. Marissa's opportunity cost of building models is per model. Steve's opportunity cost of building models is 20% higher than Marissa's. However, as the junior partner, his billing rate is 15% lower. Based on all of these facts, has a comparative advantage in building models.

Explanation / Answer

One has comparative advantage in producing/doing one thing when it has lesser opportunity cost of doing /producing that thing when compared to other.

Marissa can build 10 models per hour. For other activities, she can bill clients $500 per hour. Thus, Marissa's opportunity cost of building models is 500/10 = $50 per model.

On other hand, Steve's billing rate is 500 - 15%*500 = 425 per hour. However he can build 20% lesser than Marrissa that is 10 - 20%*10 = 8 models

Hence steve's opportunity cost is 425/8 = $53.125

As you can see $53.125 is more than $50 hence Steve's opportunity cost is more than Marrissa. And therefore Marrissa has comparartive advantage in building models.

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