Question

Assume a Ricardian (Comparative Advantage) world. Also 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 or 2 hours for desktops. Each country has 1000 labor hours available. Also, assume that these countries decide to open for trade and specializes in the products that they have comparative advantage.

Which of the following is NOT true?

A) After specialization, world total production of desktops will be 250.

B) All of these are correct.

C) After specialization, world total production of laptops will be 250.

D) After specialization, world total production of desktops will be 500.

Answer 1

We can see from above that In order to produce laptop computers home requires 8 hours and In order to produce desktop computers home requires 2 hours. Thus In order to produce 1 laptop Home has to sacrifice 8 hours with which it can produce 8/2 = 4 desktop. Hence, Opportunity cost of producing 1 laptop for home is 4 desktop.

We can see from above that In order to produce laptop computers ROW requires 4 hours and In order to produce desktop computers ROW requires 2 hours. Thus In order to produce 1 laptop ROW has to sacrifice 4 hours with which it can produce 4/2 = 2 desktop. Hence, Opportunity cost of producing 1 laptop for ROW is 2 desktop.

Hence Opportunity cost of producing Laptop os lesser for ROW and hence ROW has comparative advantage oin producing laptops and hence will specialize in producing laptops and hence will produce laptops only implies Total laptopbs produced by ROW = 1000/4 = 250 laptops.

Thus Home has comparative advantage in producing desktop and hence will specialize in Desktop and will produce desktop only. So Home will produce 1000/2 = 500 desktops only.

So, Total laptop computers produced = 250 and Total desktop computers produced = 500.

Hence, Statement (A) is incorrect

Hence, the correct answer is (A) After specialization, world total production of desktops will be 250.