The nations of Appleland and Orangeland produce apples and oranges. In Appleland
ID: 1154434 • Letter: T
Question
The nations of Appleland and Orangeland produce apples and oranges.
In Appleland, there are 100,000 hours of labor available in a month, and it takes 2 hours of labor to produce a barrel of apples, and 4 hours of labor to produce a crate of oranges.
In Orangeland, there are 200,000 hours of labor available in a month, and it takes 4 hours of labor to produce a barrel of apples and 1 hour of labor to produce a crate of oranges.
1. Which country has an absolute advantage in each good?
2. What is the opportunity cost of a crate of oranges in Orangeland?
3. What is the opportunity cost of a crate of oranges in Appleland?
4. Which country has a comparative advantage in each good?
Explanation / Answer
Given that in Apple land its take 2 hours of labour to produce a barrel of Apple and there are in total 100,000 hours of labour it show that the maximum the Apple land can produce is 50000 barrels of Apple. Similarly it can produce 25,000 crates of oranges.
With 200,000 hours of labour in Orange Iand, it can maximum produce 50000 barrels of apple and 200,000 crates of oranges.
When a country is able to produce a particular good with lower resource requirement it has absolute advantage. For the production of Apple the resource requirement is lower in apple land so apple land has absolute advantage in the production of apples. The resource requirement is lower for oranges in orange land so Orange land has absolute advantage in production of oranges.
The opportunity cost of one barrel of Apple is 0.5 crates of orange in apple land and 4 crates of orange in orange land. This implies, the opportunity cost of one crate of orange is 2 barrel of Apple in apple land and 0.25 barrel of Apple in orangeland.
This indicates that the opportunity cost is in Lower for apple land and therefore apple land has comparative advantage in the production of Apple. Similarly Orange land has comparative advantage in the production of oranges.