Because of the quantity and quality of its resources, the U.S. has an absolute a
ID: 1168128 • Letter: B
Question
Because of the quantity and quality of its resources, the U.S. has an absolute advantage in the production of many goods and services. Does this imply that the U.S. cannot benefit from trading with a developing country that has less productive ability? Why or Why Not
2. The following table shows output per hour for Martha and Stewart who make gift baskets and potholders:
Output per Hour
Martha
Stewart
Gift Baskets
10
8
Potholders
20
12
What is the opportunity cost of a potholder for Martha? What is the opportunity cost of a potholder for Stewart? Who has an absolute advantage in producing potholders? Who has a comparative advantage in producing potholders?
Output per Hour
Martha
Stewart
Gift Baskets
10
8
Potholders
20
12
Explanation / Answer
When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.
The opportunity cost of a hotholder for Martha is stopping 10 gift baskets
The opportunity cost of a hotholder for Stewart is stopping 8 gift baskets.
Absolute advantage : The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group. Marthas has the absolute advantage in producing potholders.
Comparative advantage: The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. Marthas and Stewrt both has the comparative advantage in producing potholders.