Homer and Teddy Are Stranded on a Desert Island

question 112

Multiple Choice

Homer and Teddy are stranded on a desert island.To feed themselves each day they can either catch fish or pick fruit.In a day,Teddy could pick 60 pieces of fruit or catch 20 fish.Homer could pick 100 pieces of fruit or catch 150 fish.Which of the following statements is correct?

• A) Homer has an absolute advantage in catching fish and Teddy has an absolute advantage in picking fruit.
• B) Homer has an absolute advantage in picking fruit and Teddy has an absolute advantage in catching fish.
• C) Homer has an absolute advantage in both catching fish and picking fruit.
• D) Teddy has an absolute advantage in both catching fish and picking fruit.

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Definitions:

Total Costs

The sum of all expenses incurred in the production of goods or services, including direct and indirect costs, both variable and fixed.

Step-Down Method

A method of allocating costs whereby one service department’s cost is allocated to all remaining service departments and operating departments, and so on, until all service department costs are allocated to final products.

Death Spiral

A situation occurring when transfer prices include fixed costs and users reduce their use of the internal product or service. This further increases the transfer price (based on average cost) and more users reduce their demand.