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Category - Economics

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If company A is better than company B at both producing T-shirts and at selling them retail, why might company A contract the first job to company B?
  1. Company B has an absolute advantage at producing T-shirts.
  2. Company A believes it will benefit from future competition.
  3. There is no reason for company to contract out the work.
  4. Company B has a comparative advantage at producing T-shirts.
Explanation
Answer: D - Company A would contract the job to company B if company B has a comparative advantage. Assume that producing T-shirts is time-consuming and has a low profit margin. Company A might contract the work to company B so that it can focus on the more lucrative retail sales. Since company B is bad at both jobs, its opportunity costs are lower; these low opportunity costs are its comparative advantage.
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