Question

The world produces two goods: pizza & beer. In Brazil the price of a bottle of beer is $4 and the price of pizza is $15. In the rest of the world, a bottle of beer is $3.25 and a pizza is $12.

What is one conclusion we can make?

a.) The rest of the world has a comparative advantage in the in the production of pizza and beer

b.) Brazil has an absolute advantage in the production of pizza and beer

c.) Pizza and beer are compliments and must be produced together

d.) Brazil is a closed economy

explain

Answer 1

Lets summarize the information given to us:

Country	Beer Price	Pizza Price
Brazil	$4	$15
Rest of the world	$3.25	$12

We need to understand that we are given the prices and not the cost of production of these countries. Price is the amount of money the consumer of these goods pay for purchasing each unit. If Brazil is able to sell these goods at a higher price than rest of the world, this is a good market to enter for other producers, but this is not happening and therefore, this indicates that there are barriers to entry in Brazil. This implies that Brazil is a closed economy which can afford to charge a non-competitve price to the consumers without fearing being driven out by competing player. So the correct option is D

Options A and B can be eliminated as they depend on the cos of production data, which we are not given here. Also there is no information on these goods being compliments to each other so option C can also be eliminated.