Question

PLEASE explain how you arrived at each answer. Thank you.

……………………Inputs per unit of strawberry output………Inputs per unit of curtain output

Birdy Island                                         60                                                                           80

Ducky Island                                       40                                                                           40

Assume the following: Strawberry and curtain are the only two products produced in these islands. There are constant ratios of input to output whatever the level of output of strawberry and curtain. Lastly, competition prevails in all markets.

1.            Which country has comparative advantage in which good?

                A.            Birdy has a comparative advantage in curtain.

                B.            Birdy has a comparative advantage in strawberry.

                C.            Ducky has a comparative advantage in strawberry.

                D.            Birdy has comparative advantage in both strawberry and curtain.

2.            If Birdy international trade were allowed, what price ratio would prevail between the strawberry               and curtain within Birdy Island? Ducky Island?

                A.            0.75 C/S in Birdy while 1 C/S in Ducky.

                B.            0.75 S/C in Birdy while 1 S/C in Ducky.

                C.            1.33 C/S in Birdy while 1 C/S in Ducky.

                D.            1.5 C/S in Birdy while 2 C/S in Ducky.

Answer 1

Given,

……………………Inputs per unit of strawberry output………Inputs per unit of curtain output

Birdy Island                                         60                                                                           80

Ducky Island                                       40                                                                           40

So from the above information we can conclude that following is the output produced for for every input:

……………………Unit produced for every input………Unit produced for every input

Birdy Island 1/60 1/80

Ducky Island 1/40 1/40

Based on the above information;

Let's calculate, who has the comparitive advantage in making Strawberry,

Birdy = (1/80)/ (1/60) = 60/80 = 3/4 which implies for every strawberry that the Birdy produces it gives up 0.75 unit of curtains

Ducky = (1/40)/ (1/40) = 1 which implies for every strawberry that the Ducky produces it gives up 1 unit of curtains

Comparitive Advantage is who can produce something at a lower opportunity cost, so in this case Birdy has a comparitive advantage of producing strawberry

Now, let's calculate, who has the comparitive advantage in making Curtains;

Birdy = (1/60)/ (1/80) = 4/3 which implies for every Curtains that the Birdy produces it gives up 1.33 unit of Strawberry

Ducky = (1/40)/ (1/40) = 1 which implies for every curtains that the Ducky produces it gives up 1 unit of strawberry

Comparitive Advantage is who can produce something at a lower opportunity cost, so in this case Ducky has a comparitive advantage of producing curtains.

Based on the above calculation, let's answer each of the question:

1. Which country has comparative advantage in which good?

Answer:  B. Birdy has a comparative advantage in strawberry.

2. If Birdy international trade were allowed, what price ratio would prevail between the strawberry and curtain within Birdy Island and Ducky Island?

Answer:  D. 1.5 C/S in Birdy while 2 C/S in Ducky.

Birdy spends 60 units of inputs to produce 1 unit of strawberry whereas Ducky spends 40 units of inputs to produce 1 unit of strawberry, hence it will be  60/40 = 1.5C/S, similarly, Birdy spends 80 units of inputs to produce 1 unit of curtains whereas Ducky spends 40 units of inputs to produce 1 unit of curtains, hence it will be 80/40 = 2C/S