In: Economics
Question 1
Production |
Country A Labour |
Country B Labour |
1 of Widget |
4 |
5 |
60 of Something |
5 |
10 |
Assume that each country has 30 million workers.
(i) If there is no trade, and in each country 20 million workers produce widgets and 10 million workers produce something, how many widgets and how many something will each country produce? What will be the total production of each product?
(ii) What is the opportunity cost of a widget in: (i) Country A; (ii) Country B?
(iii) What is the opportunity cost of 60 something in: (i) Country A; (ii) Country B
(iv) Which country has a comparative advantage in which product?
(v) Explain the principle of increasing opportunity cost and does this example illustrate the principle of increasing opportunity cost.
(vi) What change might shift both countries production possibilities frontier outwards.
Solution :
A.)
Economice is concerned with the production, distribution and consumption of goods and services. It is concerned with how people makes decisions when faced with scarcify.
i.)
Let "60 something" be termed as S for simplification
COUNTRY A
1 unitt of weight in country A requires 4 units of labour. in labour in country A can produce 1/4 widge widget or 1/5 of S.
so,
20 million workers will produce = (1/4)*20 million widgets = 5 million widgets.
10 million workers will produce (1/5)*10 = 2 million S
COUNTRY B
1 unit of labour in country B can produce either 1/5 widgets or 1/10 S
so,
20 million workers will produce = (1/5)* 20 million widgets = 4 million widgets
10 million workers will produce (1/10)*10 = 1 million S
Total widgets produced = 5+4 = 9 million
Total S produced = 2+1 = 3 million
ii.)
Opportunity cost of widget in country A = 4/5 S
opportunity cost of widget in country B = 5/10 S
iii.)
Opportunity cost of S in country A = 5/4 widgets
Opportunity cost of S in country B = 10/5 widgets
iv.)
The country which has a lower opportunity cost has a comparative in that product.
So,
country A has comparative advantage in the production of S and country B has the comparative advantage in the production of widgets.
v.)
Principle of increasing opportunity cost means that as more number of widgets are produce, producing one more widget would require sacrifice of 4/5 S in country A and 5/10 S in country B.
vi.)
Incerase in the number of workers would lead to an outwards shift in the PPF