Question

Below is a table showing the daily production numbers for 1 worker in both Mexico and Canada. Use these numbers to answer the questions below.

1 worker in Mexico can produce in 1 day	1 worker in Canada can produce in 1 day
10 sodas or 5 pizzas	24 sodas or 8 pizzas

1. What country has the absolute advantage in pizzas? Explain your answer with numbers.

1. What country has the absolute advantage in sodas? Explain your answer with numbers.

1. Determine the opportunity cost of producing 1 pizza in Canada.

1. Determine the opportunity cost of producing 1 pizza in Mexico.

1. Determine the opportunity cost of producing 1 soda in Canada.

1. Determine the opportunity cost of producing 1 soda in Mexico.

1. What country has the comparative advantage in pizzas and, thus, will specialize in pizzas when trading? Explain you answer with numbers.

1. What country has the comparative advantage in sodas and, thus, will specialize in sodas when trading? Explain your answer with numbers.

1. Determine a trade agreement for 1 pizza (price in terms of x number of sodas for 1 pizza) that both countries would benefit from. (Do not give me a range of prices. Just give me one price and one price only.) (Hint: who will be buying and who will be selling pizzas?)

1. Explain (using numbers) how Canada would benefit from your answer to (i) above.

1. Explain (using numbers) how Mexico would benefit from your answer to (i) above.

Answer 1

Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

1) Canada has an absolute advantage in the production of pizzas.

2) Canada has an absolute advantage in the production of soda.

Comparative Advantage

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

3) Canada:

8 pizzas = 24 sodas

1 pizza = 24/8 = 3 sodas

Opportunity cost of 1 pizza is 3 sodas.

4) Mexico:

5 pizzas = 10 sodas

1 pizza = 10/5 = 2 sodas

Opportunity cost of 1 pizza is 2 sodas.

5) Canada:

24 sodas = 8 pizzas

1 soda = 8/24 = 0.33 pizzas

Opportunity cost of 1 soda is 0.33 pizza.

6) Mexico:

10 sodas = 5 pizzas

1 soda = 5/10 = 0.5 pizzas

Opportunity cost of 1 soda is 0.5 pizzas.

7) Mexico has comparative advantage in the production of pizza because Mexico has lower opportunity cost in the production of pizza.

8) Canada has comparative advantage in the production of soda because Canada has lower opportunity cost in the production of soda.