Question

Kiah and Ali are married. They spend their time performing two favorite activities, batik printing and making keropok. Keropok is Malaysian popular cracker, made from dough sifted flour with crushed fish and sliced ​​thinly and dried before frying into pieces. Kiah takes 2 hours to print a piece of batik cloth and 1 hour to make a kilogram of keropok. Ali takes 3 hours to print a piece of batik cloth and 2 hours to make 1 kilogram of keropok.

1. Construct a table of absolute advantage and a table of comparative advantage.

2. Who has the absolute advantage in batik printing? Who has the absolute advantage in making keropok? Briefly explain.

3. Who has the comparative advantage in batik printing? Who has the comparative advantage in making keropok? Briefly explain.

4. If Kiah and Ali trade with each other, who will trade away batik cloth in exchange of keropok? Briefly explain.

[Total: 15 marks]

Answer 1

1)

Absolute advantage Table

In case of batik cloth, Kiah's productivity =1/2 piece per hour

In case of batik cloth, Ali's productivity =1/3 piece per hour

In case of keropok, Kiah's productivity =1/1 kg per hour

In case of keropok, Ali's productivity =1/2 kg per hour

	Productivity per hour
	Batik	Keropok
Kiah	1/2	1
Ali	1/3	1/2

Comparative advantage table

In case of Kiah,

Opportunity cost of producing 1 piece of batik=(1)/(1/2)=2 Kgs of keropok

Opportunity cost of producing 1 kg of keropok=(1/2)/(1)=1/2 pieces of batik

In case of Ali,

Opportunity cost of producing 1 piece of batik=(1/2)/(1/3)=3/2 Kgs of keropok

Opportunity cost of producing 1 kg of keropok=(1/3)/(1/2)=2/3 pieces of batik

	Opportunity Cost of
	Batik	Keropok
Kiah	2	1/2
Ali	3/2	2/3

b)

We can see that Kiah is more productive in Batik production. So, Kiah has a absolute advantage in producing Batik prints.

We can see that Kiah is more productive in Keropok production. So, Kiah has a absolute advantage in producing Keropok.

c)

We can see that Ali has a lower opportunity cost of production in case of Batik. So, Ali has a comparative advantage in Batik printing.

We can see that Kiah has a lower opportunity cost of production in case of Keropok. So, Kiah has a comparative advantage in producing Keropok.

d)

Since Ali has a comparative advantage in batik production. He will specialize in batik cloth production. He will trade away batik cloth in exchange of Keropok.