1. In France it takes one worker to produce one sweater, and one worker to produce...

1. In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine.

a. Who has the absolute advantage in production of sweaters? In the production of wine? How can you tell?

b. Calculate the opportunity cost of producing 6 additional sweaters in France and in Tunisia. Which country has a comparative advantage in the production of sweaters?

c. Calculate the opportunity cost of producing 6 additional bottles of wine in France and Tunisia.

Which country has a comparative advantage in the production of wine?

d. In this example, is absolute advantage the same as comparative advantage, or not?

e. In what product should France specialize in producing? In what product should Tunisia specialize in producing?

Solutions

Expert Solution

We first compute the number of Sweaters & Wine that can be produced by 1 worker, as follows.

	Quantity of Wine	Number of Sweater
France	1/1 = 1	1/1 = 1
Tunisia	1/3 = 0.33	1/2 = 0.5

(a) Using 1 worker, France can produce more wine than Tunisia can (1 > 0.33) and more sweaters than Tunisia can (1 > 0.5), therefore France has absolute advanage in both Wine and Sweater.

(b) Opportunity cost (OC) is computed as follows.

In France, OC of 1 sweater = 1/1 = 1 Wine. Therefore, OC of 6 sweaters = 6 x 1 = 6 Wine.

In Tunisia, OC of 1 sweater = 0.33/0.5 = 0.66 Wine. Therefore, OC of 6 sweaters = 6 x 0.66 = 3.96 Wine.

Since Tunisia has lower OC in Sweater than France (0.66 < 1), Tunisia has comparative advantage in Sweater.

In France, OC of 1 Wine = 1/1 = 1 Sweater. Therefore, OC of 6 wine = 6 x 1 = 6 Sweaters.

In Tunisia, OC of 1 wine = 0.5/0.33 = 1.52 Sweater. Therefore, OC of 6 Wine = 6 x 1.52 = 9.12 Sweaters.

Since France has lower OC in Wine than Tunisia (6 < 9.12), France has comparative advantage in Wine.

(d) Absolute advantage is not the same has comparative advanage. France has absolute advantage in both goods, but comparative advantage in Sweaters only.

(e) As per the law of comparative advantage, France should specialize in Sweaters and Tunisia will specialize in Wine.

Rahul Sunny answered 1 year ago

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