Question

Suppose that the United States and Mexico have the following productive ability:

Production per Hour	Silicon Chips	Cars
United States	100	10
Mexico	20	5

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A) Which country has an absolute advantage in producing cars? chips?

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B) Which country would have a comparative advantage in producing cars? chips?

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C) Assume that the countries are both perfectly rational and their only consideration is maximizing their economic wellness. Will Mexico and the United States specialize and trade? Why? What will they each specialize in?

Answer 1

1)United States can produce more silicon chips than Mexico which implies that it has absolute advantage in the production of silicon chips. Similarly it can produce more cars than Mexico which again implies that it has absolute advantage in the production of cars. Note that with same resources if a nation is able to produce more of a good then it has absolute advantage in its production

2) the opportunity cost of producing one car in the United States is 10 silicon chips and the same in Mexico is 4 silicon chips. This shows that Mexico has lower opportunity cost of producing car. Therefore Mexico has comparative advantage in the production of cars and United States has comparative advantage in the production of silicon chips

3) Mexico and United States can specialise and trade with each other. Mexico will specialise in the production of cars in which it has comparative advantage and United States will specialise in the production of silicon chips in which it has comparative advantage.