Question

Using the same quantity of resources, the United States and Canada can both produce lumberjack shirts and lumberjack boots, as shown in the following table.

United States		Canada
Lumberjack Shirts (in thousands)	Lumberjack Boots (in thousands)	Lumberjack Shirts (in thousands)	Lumberjack Boots (in thousands)
0	60	0	50
10	45	10	40
20	30	20	30
30	15	30	20
40	0	40	10
		50	0

A. Calculate the opportunity cost of producing a lumberjack shirt in the United States and in Canada.

B. Use the information in the table above to explain the difference between absolute and comparative advantage. In your answer, you must correctly define absolute and comparative advantage.

C. Explain whether the United States and Canada will benefit from trade. If the countries benefit from trade, explain which country will produce lumberjack shirts and which will produce lumberjack boots.

D. If Canada has a technological innovation in shoe production that allows the country to produce 15,000 more boots at each production level described above, will Canada benefit from trade with the United States? Please explain your answer.

Answer 1

(A) Opportunity cost is the benefit given up to achieve another chosen option.

Here, according to the given data

Opportunity cost of producing a shirt in the United States is the Cost of producing boots divided by Cost of producing shirt i.e.

Opportunity cost of producing shirt in Canada is

(B) Absolute advantage is when a producer can produce a certain good by using fewer resources like raw material, manpower or time.

In comparative advantage the focus is on reducing the opportunity cost of producing a good.

Here, according to the data given.

United States  has absolute advantage in producing boots as US can produce 60,000 units of boots while Canada can only produce 50,000 units of boots at 0 production of shirts. Therefore United States has advantage of 10,000 units (60,000-50,000) in production of boots.

From part(A) we can clearly see that opportunity cost of producing a shirt US is 1.5 while opportunity cost of producing a shirt in Canada is 1. So, according to the definition stated above. Canada has comparative advantage in producing shirts. As opportunity cost of producing shirts in Canada is lower than the opportunity cost of producing shirt in US i.e 1 is less than 1.5 .

(C) Yes, United States & Canada will get benefited from the trade. As seen in part (B) Opportunity cost of producing shirts in Canada is lower than the opportunity cost  of producing shirt in United States.So Canada will produce Shirts due to lower opportunity cost and United States will produce boots due to comparative advantage.

(D) Yes, Canada will still be benifited from the trade even if it has technological innovation because the opportunity cost of producing boots will still be higher in Canada than United states.

According to new data-

Opportunity cost of producing boots in United statesOpportunity cost of producing boots in Canada is

Therefore Canada will still be benefited from the trade because opportunity cost of producing boots in United States Is lower than the opportunity cost of producing boots in Canada.