Question

The next three questions deal with the following situation: There are two
nations, Perelandra and Malacandra. They produce two goods: gold and sulfur. In
a single year, Perelandra can produce 5,000 tons of gold and 2,000 tons of sulfur. In
the same period of time, Malacandra can produce 5,000 tons of gold and 10,000 tons of
sulfur.

7. Which of the following statements is true?
(A) Perelandra has comparative advantage in gold, and absolute advantage in gold.
(B) Perelandra has comparative advantage in sulfur, and absolute advantage in sulfur.
(C) Malacandra has absolute advantage in gold, and comparative advantage in gold.
(D) Malacandra has absolute advantage in sulfur, and comparative advantage in sulfur.

8. Assume that both nations are productively efficient, and they each have a constant
Marginal Rate of Transformation. Initially, before trade, Perelandra makes 1,000 tons
of sulfur. How many tons of gold does Perelandra produce?
(A) 2,000.
(B) 2,500.
(C) 500.
(D) 3,000.

9. Assume that each nation specializes solely in the good for which it has comparative
advantage. Which of the following would be a benecial trade?
(A) Perelandra gives Malacandra 500 tons of gold in exchange for 300 tons of sulfur.
(B) Perelandra gives Malacandra 500 tons of gold in exchange for 100 tons of sulfur.
(C) Perelandra gives Malacandra 500 tons of sulfur in exchange for 500 tons of gold.
(D) None of the above.

Answer 1

Answer)

1. When we talk about absolute advantage,we talk about who produces more in same time,so here Perelandra and Malacandra both produces 5000 tons of gold,so no one has absolute adntage in gold but in sulfur Malacandra has absolute advantage as it produces more than Perelandra,while when we talk about comparitive advantge we talk about who has less opportunity cost that is who has to give up less of one good to produce other good,here in gold Perelandra has to give up 2000 tons of sulfur to produce additional5000 tons gold while Malacandra has to give up 10000 tons of sulfur for same,so Perelandra has comparitive advantage in gold while in sulfur for additional 2000 units of sulfur Perelandra has to give up 5000 tons of gold while for Malacandra it is 1000(5000/5) tons of gold only,so Malacandra has comparitive advantage in sulfur,only option d ) Malacandra has absolute advantage in sulfur,and comparitive advantage in sulfur represents true statement based on our explanation so correct option is d) Malacandra has absolute advantage in sulfur,and comparitive advantage in sulfur
2. Since marginal rate of transformation is constant an we know that Perelandra makes 5000 tons of gold and 2000 tons of sulfur,so for every 1 ton of sulfur it makes 2.5 tons of gold,so for 1000 tons of sulfur it will produce 2500 tons of gold,so correct option is b) 2500
3. We have already derived in part 1 of this question that Perelandra has comparitive advantage in gold while Malacandra in sulfur,now coming to options,in option a) both are specializing in good they have comparitive advantage and Perelandra is benefitting as it is giving 500 tons of gold for 300 tons of sulfur while on its own it would have only produced 200 tons of sulfur for 500 tons of gold,Malacandra is benefitting too as on its own for 300 tons of sulfur it would have produced only 150 tons of gold,coming to option b)Perelandra would not benefit as it is getting only 100 tons of sulfur for 500 tons of gold while on its own it would have got 200 tons,option c is not valid as they are not producing things in which they have comparitive advantage,so based on above explanation correct option is a) Perelandra give Malacandra 500 tons of gold in exchange for 300 tons of sulfur.

Answer is complete.Thank you!