Question

Microeconomics

Construct Production Possibility Frontiers graphs with constant opportunity costs for United States and Chile.  Assume there are two goods in these economies: Wheat and Copper.  If the U.S. puts all of its resources into the production of wheat, it can produce 300,000 units of wheat; if it puts all of its resources into the production of Copper, it can produce 150,000 units of copper. If the Chile puts all of its resources into the production of wheat, it can produce 100,000 units of wheat; if it puts all of its resources into the production of Copper, it can produce 100,000 units of copper.  

            a. Determine the opportunity costs of both countries to produce both wheat and copper.

b. Which country has the absolute advantage in the production of each good? Explain why.

            c. Which country has the comparative advantage in the production of each good? Explain why.

Answer 1

	Wheat	Copper
US	300,000	150,000
Chile	100,000	100,000

a) US opportunity cost of Wheat= 150,000/300,000= 0.5

US opportunity cost of Copper= 300,000/ 150,000= 2

Chile opportunity cost of Wheat= 100,000/ 100,000= 1

Chile opportunity cost of Copper= 100,000/ 100,000= 1

b) US is more productive or cost-efficient in producing Wheat. US has absolute advantage in producing product Wheat and copper both. US uses less time than Chile to produce either Wheat or Copper. US makes 300,000 units of Wheat while Chile makes 100,000 units of wheat, and US makes 150,000 units of copper t while Chile produces 100,000 units of Copper. In other words, US has an absolute advantage in producing  both Wheat and copper. US has the capability to produce more of both the products using less of a given resource than Chile. US uses fewer resources than Chile to produce both the goods.

c) A nation or a country is said to have a comparative cost advantage if it produces a good or service which has the lowest opportunity cost. When comparing the opportunity cost of Wheat for both the United States and the Chile, we can see that the opportunity cost of Wheat(0.5) is lower in the United States as compared to Chile(1). Therefore, the United States enjoys a comparative advantage in the production of Wheat. In addition, when comparing the opportunity cost of Copper for both the United States and the Chile, we can see that the opportunity cost of copper(1) is lower in Chile as compared to US(2). Therefore, Chile enjoys a comparative advantage in the production of Copper.