Refer to Figure 3-23. In the nation of Cropitia, the opportunity cost of a pound
ID: 1143054 • Letter: R
Question
Refer to Figure 3-23. In the nation of Cropitia, the opportunity cost of a pound of cheese is 1.5 pounds of ham. Bonovia and Cropitia both can gain from trading with one another if one pound of cheese trades for
a. 1.0 pound of ham. b. 1.4 pounds of ham. c. 2.1 pounds of ham. d. All of the above are correct. Figure 3-23 below represents the various combinations of ham and cheese (in pounds) that the nation of Bonovia could produce in a given month. 360 poands) 320 240 200 160 120 80 40 40 80 120 160 200 240 280 320 360 400 an poundsExplanation / Answer
Answer
The correct answer is (b) 1.4 pounds of ham
Opportunity cost of producing one pound of cheese in Croatia is 1.5 pounds of Ham. We can see from above graph (PPF of Bonovia) that If Bonovia Uses its given resources efficiently then If can produce 320 pound of cheese or it can produce 400 pounds of Ham. Hence In order to produce 320 pound of cheese Bonovia has to 400 pounds of Ham, hence in order to produce 1 pound of cheese Bonovia has to sacrifice = 400/320 = 1.25 pounds of Ham. Hence opportunity cost of producing 1 pound of cheese in Bonovia is 1.25 pounds of Ham.
Hence Opportunity cost of producing cheese is lesser in Bonovia than Croatia. Hence Bonovia has comparative advantage in Producing in producing Cheese and hence Bonovia will export cheese and Croatia will import cheese.
Exporting Cheese is beneficial for Bonovia if It get more than its opportunity cost i.e. If it gets more than 1.25 pound of Ham for 1 pound of Cheese. Importing Cheese is beneficial for Croatia if It get 1 pound of cheese at a lesser price than its opportunity cost i.e. It paid less than 1.5 Ham for 1 pound of cheese. Hence Trade is Benefitial If 1.25H < 1C < 1.5H. Hence Trade is benefitial for Both Bonovia and Croatia If For 1 Pound of Cheese trade occur between pound of Ham and pound of Ham.
Hence the correct answer is (b) 1.4 pounds of ham