Consider the following table. Numbers denote hours to produce 1 unit The world p
ID: 1134091 • Letter: C
Question
Consider the following table.
Numbers denote hours to produce 1 unit
The world per unit gains of specializing according to
Absolute advantage are...
In order to answer, ask yourself:
(1) Who has the absolute advantage at what?
(2) If Country A and B specialize according to absolute advantage, who gives up the production of bananas? who gives up the production of Apples?
(3) How many units of bananas are gained by the Country specializing in bananas, any time this Country gives up 1 apple?
(4) How many units of apples are gained by the Country specializing in apples, any time this Country gives up 1 banana?
(5) Finally: the world is composed by Country A and Country B together. To find the world's per-unit gain, sum up gains and what we give up for both Country A and Country B, for both bananas and apples.
-0.5 apple; 4 bananas
2 apples; 2 bananas
1 apple; 2 bananas
2 apples; 1 banana
Country A Country B Bananas 4 5 Apples 20 10Explanation / Answer
Answer : 1) According to given table,
For Bananas : Country A has absolute advantage. Because country A produces 1 unit of bananas in less time in comparison of country B.
For Apples : Country B has absolute advantage. Because country B produces 1 unit of apples in less time in comparison of country A.
2) On the basis of absolute advantage, as country A has absolute advantage in producing bananas, hence country A should produce bananas and country B should give up. Therefore, country B gives up bananas production.
Similarly, country A gives up the apple production. As country B has absolute advantage in producing apple, hence country B should produce apples and country A should give up.
3) As country A takes less time to produce 1 unit of bananas, hence country A is specialized in producing bananas. Country A takes 4 hours to produce 1 unit of bananas and 20 hours to produce 1 unit of apples. Now, if country A give up the apple production then the 1 apple production time (20 hours) will be used in the production of bananas.
In 4 hours country A produces 1 unit of banana
In 1 hour country A produces = 1/4 unit of banana
In 20 hours country A produces = (1*20)/4 = 5 units of bananas.
Therefore, if country A give up the apple production then the banana production is gained by 5 units of bananas.
4) As country B takes less time to produce 1 unit of apples than the country A, hence country B is specialized in producing apples. Country B takes 5 hours to produce 1 unit of bananas and 10 hours to produce 1 unit of apples. Now, if country B give up the banana production then 1 banana producton time (5 hours) will be used in the production of apples.
In 10 hours country B produces 1 unit of apples
In 1 hour country B produces = 1/10 unit of apples
In 5 hours country B produces = (1*5)/10 = 0.5 unit of apples.
Therefore, if country B give up the banana production then the apple production is gained by 0.5 unit of apples.
5) Option B is correct.
For apple : Country B gians 1 apple + Country A gives up 1 apple = 2 apples.
For banana : Country A gains 1 banana + Country B gives up 1 banana = 2 bananas.
Therefore, the sums of two countries (Country A and Country B) gain and give up for both apples and bananas are 2 apples and 2 bananas respectively.