QUESTION 18 Two countries, A & B, are each able to produce two products, widgets
ID: 1134009 • Letter: Q
Question
QUESTION 18 Two countries, A & B, are each able to produce two products, widgets and zercs. Country A can produce 90 widgets or 45 zercs, or some combination of the two. Country B can produce 100 widgets or 100 zercs, or some combination of the two. Currently, Country A is consuming 60 widgets and Country B is consuming 60 widgets. Both countries agree that any gains from specialization will be shared equally. Also, the world-wide production of neither good may fall as a result of specialization. Fill in the blanks below. Use the cell numbers in the table as a guide. (For blanks requiring a fraction, please use a decmial, for example, use.5 for 1/2,.33 for 1/3 and.25 for 1/4.). Domestic Cost Ratios Consumption Before Spec. Production After Spec. Consumption After Spec. Country Comp. Adv #1 13 15 17 14 16 18 19 21 23 10 Worldwide Tota 12 24 The cost of producing one widget in Country A IS #1 The cost of producing one zerc n Country A IS #2 The cost of producing one widget in Country B is #3 The cost of producing one zerc in Country B is #4 Country A has the comparative advantage in the production of #5 Country B has the comparative advantage in the production of #6 zerc(s) widget(s) zerc(s) widget(s) (enter Wor Z) enter W or Z)Explanation / Answer
1) Country A can produce 90 widgets or 45 zercs . So for prducing 90 widgets , A has to forgo 45 zercs . Hence to produce 1 widget , a has to forgo = 45/ 90 = 1/2 = 0.5 zercs
2) Similarly cost of producing 1 zerc in country A = 90/45 = 2 widgets .
3) In the same process we can find the cost of producing 1 widget in B = 100 / 100 = 1 zerc
4) The cost of producing 1 zerc in country B = 100 / 100 = 1 widget .
5) Comparative advantage is found by lokking at the opportunity cost of production . Since country A has a lower opportunity cost in producing widget , so it will have CA in W
6) Similarly country B has the CA in the production of Z