Consider the following table. Numbers denote hours to produce 1 unit What are th
ID: 1134135 • Letter: C
Question
Consider the following table.
Numbers denote hours to produce 1 unit
What are the world's per-unit gain for bananas if Country A and B specialize according to their absolute advantage?
What are the world's per-unit gain for apples if Country A and B specialize according to their absolute advantage?
In order to answer, ask yourself:
(1) Who 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.
A: 4 extra bananas; 2.5 extra apples
1 extra banana; 1 extra apple
not enough information
3 extra bananas; 1.5 extra apples
Country A Country B Bananas 1 5 Apples 4 2Explanation / Answer
Country A can Produce 1 banana in 1 hour, 0.25 apples in 1 hour and Country B can produce 0.5 apples in 1 hour ,0.2 banana in 1 hour
therefore Country A has an absoulte advantage in producing banana and Country B has an absolute advantage in producing apples
Country A shhould give up the production of Apples and Country B shuld give up the production of Bananas
Earlier both countries would have produced 1 Apple and 1 Banana in 6 hours of production now considering specialisation they can produce 3 Apples and 6 Bananas altogether in 6 hours
Hence they have gained 1 apple and 4 bananas after this specialisation