Question

Assume that in an hour, Home requires 8 hours for laptop computers and 2 hours for desktop computers while the Rest of the world (ROW) needs 4 hours for laptops and 2 hours for desktops. Each country has 2,000 labor hours available. The labor requirements for desktops does not change with the quantity of output. On the other hand, when ROW produces 400 or more laptops, its labor requirement decreases to 3 hours per laptop.

What is the world total production when ROW uses its economies of scale advantage?

A) 400 laptops and 1000 desktops

B) 400 laptops and 1400 desktops

C) 1000 desktops and 450 laptops

D) 375 laptops and 1400 desktops

Answer 1

Number of desktops that can be produced at Home = 2000/2 = 1000

Number of laptops that can be produced at Home =

= 2000/8 = 250 laptops

So, opportunity cost of producing a desktop =

250/1000 = 0.25 laptop

Opportunity cost of producing a laptop = 1000/250

= 4 desktops

Number of desktops that can be produced at ROW = 2000/2 = 1000 desktops.

Number of laptops that can be produced in ROW (as more than 400 laptops could be produced, the labour requirement for each laptop will be 3 hours)= 2000 / 3 = 666.67 laptops.

Opportunity cost of producing desktops in ROW =

666.67 / 1000 = 0.6667 laptops

Opportunity cost of producing laptops in ROW =

1000 / 666.67 = 1.5 desktops.

So, we can see that the opportunity cost of producing desktops is less in Home, so Home will specialize in the production of desktops and ROW will specialize in the production of laptops and will produce 400 laptops and then produce desktops with the labour hours remaining.

So, home will produce only 1000 desktops.

Total labour hours required to produce 400 laptops at ROW = 400*3 = 1200 hours.

Number of hours remaining = 2000-1200 = 800 hours.

So, number of desktops that can be produced in 800 hours at ROW = 800/2 = 400 desktops.

So, total desktops produced will be 1000+400 = 1400 desktops

Total laptops produced will be 400 laptops.

So, when ROW uses it economics of scale advantage, the world total production will be 400 laptops and 1400 desktops. So option B is the correct answer.

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