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IAI Actuarial Core Principles · Business Economics · Relationship between economics and business

Ananya can produce either 40 policy documents or 20 claim assessments per day. Rohan can produce either 30 policy documents or 10 claim assessments per day. Which statement is correct?

Ananya has an absolute advantage in both tasks and a comparative advantage in claim assessments. Her opportunity cost is 2 documents per assessment against Rohan's 3, so she gives up less to do assessments. Rohan's comparative advantage lies in documents.

  1. AAnanya has an absolute advantage in both tasks and a comparative advantage in claim assessmentsCorrect
  2. BRohan has a comparative advantage in claim assessments
  3. CAnanya has an absolute advantage in both tasks and a comparative advantage in policy documents
  4. DRohan has an absolute advantage in policy documents
  5. Neither has a comparative advantage because Ananya is better at both

Explanation

Ananya's opportunity cost of one assessment is 2 documents; Rohan's is 3 documents. Ananya's cost is lower, so she has the comparative advantage in assessments. Rohan's opportunity cost of a document is 1/3 assessment versus Ananya's 1/2, so Rohan has the comparative advantage in documents. Ananya is absolutely better at both (40>30, 20>10).

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