Question

Question 2: Assume that Andia and Zardia can switch between producing wheat and producing beef at a constant rate.

	Production amounts for 1 day
	Bushel of Wheat	Pound of Beef
Andia	20	12
Zardia	15	10

1. According to the table of information above, who has the absolute advantage in making wheat? Explain.
2. According to the table of information above, who has the absolute advantage in making beef? Explain.
3. Use the information in the new table to compute who has the comparative advantage in wheat and who has the comparative advantage in beef. Show your work.
4. Based on your answer to #4, who should produce wheat and who should produce beef?
5. Explain how this example shows that when each person focuses on their own self-interest, both parties are made better off.

Answer 1

Andia has an absolute advantage in production of both wheat and beef. (More can be produced/day in comparison to Zardia)

Opportunity cost of producing 1 pound of beef (Andia) = 20/12 = 1.67 bushels of wheat

Opportunity cost of producing 1 pound of beef (Zardia) = 15/10 = 1.5 bushels of wheat

Zardia has a comparative advantage in producing beef (lower opportunity cost) while Andia has a comparative advantage in producing wheat.

Andia should produce wheat and Zardia should produce beef.

Acting on self interest would mean producing only the item where one has comparative advantage.

Total production of wheat in this case = 20 bushels

Total production of beef = 10 pounds

If both countries devoted half their time to produce both goods:

Total wheat production = 10 + 7.5 = 17.5 pounds

Total beef production = 6 + 5 = 11 pounds

Comparing both scenarios , it is clear that the extra pound of beef cannot be exchanged for production of 2.5 extra pounds of wheat (when countries act in self interest). Thus the first scenario is more efficient and parties can be made better off through trade.