Question

Suppose that

Mexico

and

Sri Lanka

are the only two countries in the world. Suppose also that in

Sri Lanka,

an acre of land can produce

45

tons of

rice

or

20

bushels of

wheat​,

while in

Mexico ​,

an acre of land can produce

30

tons of

rice

or

40

bushels of

twheat.

Which of the following statements are​ true? ​(Select all that​ apply)

A.

Sri Lanka

has an absolute advantage in the production of

rice

because it has higher productivity in

rice.

B.

Mexico

has an absolute advantage in the production of

rice

because it has higher productivity in

rice.

C.

Sri Lanka

has an absolute advantage in the production of

wheat

because it has higher productivity in

wheat.

D.

Mexico

has an absolute advantage in the production of

wheat

because it has higher productivity in

wheat.

Which of the following statements is true of comparative​ advantage?

A.

A country has a comparative advantage if it can produce less units of a good per hour than other countries.

B.

A country has a comparative advantage in the production of a good if it has a lower opportunity cost of producing that good.

C.

A country has a comparative advantage if it can produce more units of a good per hour than other countries.

D.

A country has a comparative advantage in the production of a good if it has a higher opportunity cost of producing that good.

Sri Lanka has a comparative advantage in the production of

▼

a. rice

b. wheat

​, while

Mexico

has a comparative advantage in the production of

▼

a. wheat

b. rice

.

Suppose

Mexican scientists

have developed a groundbreaking new technology that increases the productivity of

rice

in

Mexico

to

60

tons of

rice

per acre​ (and has no effect on

Mexican wheat productivity

or Sri Lanka's productivity in wheat or rice.

Given this​ information, the new technology will have

▼

a. no effect on Sri Lanka's comparative advantage in rice

b. an effect on Sri Lanka's comparative advantage in rice

Answer 1

A. Sri Lanka has an absolute advantage in the production of rice because it has higher productivity in rice.
D. Mexico has an absolute advantage in the production of wheat because it has higher productivity in wheat.
(As Sri Lanka can produce per rice per acre and Mexico can produce more wheat per acre so their absolute advantage lies in these products.)

Sri Lanka has a comparative advantage in the production of a. rice
Mexico has a comparative advantage in the production of a. wheat

(Opportunity cost of 1 ton of rice in Sri Lanka = Total wheat given up/Total rice produced = 20/45 = 0.44 bushel of wheat
Opportunity cost of 1 ton of rice in Mexico = Total wheat given up/Total rice produced = 40/30 = 1.33 bushel of wheat
So, Sri Lanka has comparative advantage in the production of rice as its opportunity cost is lower and thereby Mexico will have comparative advantage in the production of wheat.)

a. a. no effect on Sri Lanka's comparative advantage in rice
(Opportunity cost of 1 ton of rice in Mexico = Total wheat given up/Total rice produced = 40/60 = 0.5 bushel of wheat. Still, opportunity cost of 1 tons of rice is lower in Sri Lanka so there is no effect on Sri Lanka's comparative advantage in rice.)