Question

In: Economics

Nation 1 can produce Y tons of product A per worker per day and Z tons...

Nation 1 can produce Y tons of product A per worker per day and Z tons of product B per worker per day. Nation 2 can produce G tons of A per worker per day and H tons of product B per worker per day (Y, Z, G, H are numbers of your choice). A. Which nation has an absolute advantage in A? and in B?j B. In Nation 1, what is the opportunity cost of A (in terms of B)? What is the opportunity cost of B? C. In Nation 2, what is the opportunity cost of A (in terms of B)? What is the opporunity cost of B? D. Which nation has a comparative advantage in A? Why? B? Why? E. If the nations choose to trade, what is one potentially mutally agreeable price for A? For B?

Expert Solution

Let,

Y = 10

Z = 7.5

G = 2.5

H = 5

So,

Nation 1 can produce 10 tons of product A per worker per day and 7.5 tons of product B per worker per day.

Nation 2 can produce 2.5 tons of product A per worker per day and 5 tons of product B per worker per day.

Production of each product per worker per day is higher in Nation 1 in comparison to Nation 2.

When a nation can produce greater quantity of good using same set of resources relative to other nations, it is said to have absolute advantage in production of such good.

So,

Nation 1 has absolute advantage in production of Good A. Nation 1 also has absolute advantage in production of Good B.

(B)

Using 1 worker per day, Nation 1 can produce either 10 tons of A or 7.5 tons of B.

So,

The opportunity cost of producing A is (7.5/10) 0.75 tons of B.

The opportunity cost of producing B is (10/7.5) 1.33 tons of A.

(C)

Using 1 worker per day, Nation 2 can produce either 2.5 tons of A or 5 tons of B.

So,

The opportunity cost of producing A is (5/2.5) 2 tons of B.

The opportunity cost of producing B is (2.5/5) 0.5 tons of A.

(D)

A nation has comparative advantage in production of that good which it can produce at lower opportunity cost relative to other countries.

Nation 1 can produce Good A at lower opportunity cost relative to nation 2.

So, Nation 1 has comparative advantage in A.

Nation 2 can produce Good B at lower opportunity cost relative to nation 1.

So, Nation 2 has comparative advantage in B.

Rahul Sunny answered 2 years ago

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