Question

1 - Which of the following is not a correct statement about competitive advantage?

a. If France produces 50 bottles of wine per labor hour while Germany 5, France has absolute advantage over Germany in wine.

b. If France produces 25 bottles of beer per labor hour while Germany 20, France has comparative advantage over Germany in beer.

c. If France produces 50 bottles of wine per labor hour while Germany 5 and beer production is as in “b”, France has comparative advantage over Germany in wine.

d. If France produces 25 bottles of beer per labor hour while Germany 20 and wine production is as in “a”, Germany has absolute advantage over France in beer.

e. If France produces 25 bottles of beer per labor hour while Germany 20 and wine production is as in “a”, Germany has comparative advantage over France in beer

.2 - According to above, which of the following is not a correct statement about opportunity cost?

a. France’s opportunity cost of wine is ½ bottle of beer.

b. France’s opportunity cost of beer is 2 bottles of wine.

c. Germany’s opportunity cost of wine is 4 bottles of beer.

d. Germany’s opportunity cost of beer is ½ bottle of wine.

e. Germany’s opportunity cost of beer is ¼ bottle of wine

Answer 1

Ans:

1)

b. If France produces 25 bottles of beer per labor hour while Germany 20, France has comparative advantage over Germany in beer.

d. If France produces 25 bottles of beer per labor hour while Germany 20 and wine production is as in “a”, Germany has absolute advantage over France in beer.

2) d. Germany’s opportunity cost of beer is ½ bottle of wine.

Explanation

Absolute advantage is the ability of a country to carry out an economic activity more efficiently than other country.In this case per labour hour,france can produce 50 bottles of wine and 25 bottles of beer and germany can produce 5 bottles of wine and 20 bottles of beer.Hence france has absolute advantage in both wine and beer.

Comparative advantage is the ability of a country to produce a good at lower opportunity cost.

Opportunity cost for france

To produce 1 bottle of wine , 1/2 bottle of beer need to be given up.

To produce1 bottle of beer, 2 bottles of wine need to be given up.

Opportunity cost for germany

To produce 1 bottle of wine , 4 bottles of beer need to be given up.

To produce1 bottle of beer, 1/4 bottle of wine need to be given up.