Question

The table below is for questions 1-3.

In one day, one unit of labor can produce the following in two different countries;

                                      Fredonia                                      Sylvania

                          TVs           2                                                  1

                         

                          Radios      10                                                 8

1. The country of ___________ has the absolute advantage in the production of radios.

2. The country of ___________ has the comparative advantage in the production of radios.

3. If the two countries trade at a price of 6 radios for 1 TV, with trade, for one day’s work, a worker in Fredonia can have 1 TV or _________ radios, while a worker in Sylvania can have 8 radios or _______________ TVs.

Answer 1

We can see that one unit of labor can make 10 radios per day in Fredonia. While one unit of labor can make 8 radios per day in Sylvania. We can say that

The country of _Fredonia__ has the absolute advantage in the production of radios.

In case of Fredonia, opportunity cost of producing one unit of radio=2/10=0.20 TV

In case of Sylvania, opportunity cost of producing one unit of radio=1/8=0.125 TV

Opportunity cost for producing radio is lower in case of Sylvania. We can say that

The country of _Sylvania_has the comparative advantage in the production of radios.

We can see that Sylvania can specialize in making radios and Fredonia can specialize in making TV. If both countries produce as per specialization,

If the two countries trade at a price of 6 radios for 1 TV, with trade, for one day’s work, a worker in Fredonia can have 1 TV or _6 radios, while a worker in Sylvania can have 8 radios or 8/6=1.33 TVs.