QUESTION 53 Exhibit 34-5 Country 1 Country 2 Good A Good B Good A Good B...

QUESTION 53

Exhibit 34-5

Country 1		Country 2
Good A	Good B	Good A	Good B
100	0	75	0
80	10	60	30
60	20	45	60
40	30	30	90
20	40	15	120
0	50	0	150

Refer to Exhibit 34-5. The opportunity cost of one unit of good B is __________ for country 1 and __________ for country 2.

		20A; 15A
		1/20A; 1/15A
		10A; 15A
		1/2A; 1A
		2A; 1/2A

Expert Solution

Answer 53

The correct answer is (e) 2A; 1/2 A

COUNTRY 1

We can see from above table that Country A can produce either 100 units of A and 0 units of B or 80 units of A and 10 units of B. This means that in order to increase production of B from 0 to 10 units he has to decrease its production of A from 100 to 80 units i.e. in order to produce 10 units of B he has to sacrifice 100 - 80 = 20 units of A. Thus in order to produce 1 unit of B he has to sacrifice 20/10 = 2 units of A. Hence opportunity cost of producing 1 unit of B for country 1 is 2 units of A i.e. 2A (NOTE : According to above table Opportunity cost of producing B is constant)

COUNTRY 2

We can see from above table that Country A can produce either 75 units of A and 0 units of B or 60 units of A and 30 units of B. This means that in order to increase production of B from 0 to 30 units he has to decrease its production of A from 75 to 60 units i.e. in order to produce 30 units of B he has to sacrifice 75 - 60 = 15 units of A. Thus in order to produce 1 unit of B he has to sacrifice 15/30 = 1/2 units of A. Hence opportunity cost of producing 1 unit of B for country 2 is 1/2 units of A i.e. (1/2)A (NOTE : According to above table Opportunity cost of producing B is constant)

Hence, the correct answer is (e) 2A; 1/2 A

Rahul Sunny answered 5 months ago

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