Question

Each box represents the respective production capacities for two countries that produce clothing and food. Q is the quantity produced, L is labor. Each country has 1000 units of labor available.

	Clothing	Food
Canada	Qc=1,000	Qf=3,000
Germany	Qc=2,000	Qf=3,000

1. Who has the absolute advantage in producing clothing? Canada, Germany, Neither, or not enough info

2. Who had the absolute advantage in producing food? Canada, Germany, Neither, or not enough info

3. Who has the comparative advantage in producing clothing? Canada, Germany, Neither, or not enough info

4. Suppose each country exclusively specializes. Which of the following production combinations represents this choice for Canada and Germany, respectively? (note: x=clothing, y=food)

a.(0,0) and (4000,0)

b.(0,1500) and (1000,0)

c.(0,1500) and (500,750)

d.(0,3000) and (2000,0)

5. Consider the production possibilities frontier for Canada. Which of the following production combinations is feasible but inefficient? (note: x=clothing, y=food)

a.(0,3000)

b.(750,500)

c.(400,2100)

d.(750,750)

6. Consider the production functions for Germany. Labor is more productive in producing (blank), and both functions demonstrate that there is (blank).

a. Food, diminishing returns to scale

b. Clothing, diminishing returns to scale

c. Food, a constant tradeoff between the two goods

d. Clothing, a constant tradeoff between the two goods

Answer 1

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.

Germany has an absolute advantage in the production of Clothing because Germany is able to produce more clothes.

2. Neither country has an absolute advantage in the production of Food because both are able to produce same units of food.

3. 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.

Canada:

1000 units of Clothing = 3000 units of food

1 unit of Clothing = 3000/1000 = 3 units of food

Opportunity cost of producing 1 unit of clothing by Canada is 3 units of Food.

Germany:

2000 units of Clothing = 3000 units of food

1 unit of Clothing = 3000/2000 = 1.5 units of food

Opportunity cost of producing 1 unit of clothing by Canada is 1.5 units of Food.

Therefore, Germany has comparative advantage in the production of Clothing due to lower opportunity cost.

4. Germany is specialized in Clothing and Canada is specialized in Food so each country produce only that good in which it is specialized.

Germany; (2000 units of Clothing, 0 unit of Food)

Canada: (0 unit of Clothing, 3000 units of Food)

Answer is d) (0,3000) and (2000,0)