Question

Roma and Parma are both capable of producing wine and cheese. With its resources Roma can produce either 150 thousand pounds of cheese or 25 thousand bottles of wine. Parma with its resources can produce 80 thousand pounds of cheese or 10 thousand bottles of wine.

Roma’s opportunity cost of producing one bottle of wine is equal to _ pounds of cheese.

Parma’s opportunity cost of producing one bottle of wine is equal to _ pounds of cheese.

Enter numbers rounded to two decimal places as necessary.

Answer the following questions true or false.

Parma has an absolute advantage in producing wine. _ (T/F)

Parma has a comparative advantage in producing wine _ . (T/F)

Answer 1

Ans:

Roma’s opportunity cost of producing one bottle of wine is equal to 6 pounds of cheese.

Parma’s opportunity cost of producing one bottle of wine is equal to 8 pounds of cheese.

Explanation:

Roma’s opportunity cost ;

Roma’s opportunity cost of producing 1 bottle of wine = 150,000 / 25,000 = 6 pounds of cheese.

Roma’s opportunity cost of producing 1 pound of cheese. = 25,000 / 150,000 = 0.17 bottle of wine.

Parma’s opportunity cost of producing 1 bottle of wine = 80,000 / 10,000 = 8 pounds of cheese.

Parma’s opportunity cost of producing 1 pound of cheese. =10,000 / 80,000 = 0.13 bottle of wine.

Ans:

Parma has an absolute advantage in producing wine - False

Parma has a comparative advantage in producing wine - False

Explanation:

Roma has an absolute advantage in producing both wine and cheese.

Parma has a comparative advantage in producing cheese due to the lower oppotunity cost as compared to Roma.