Chapter 8, Problem 15 of Economics 4th Edition Assume Saudi Arabia and the Unite

Question

Chapter 8, Problem 15 of Economics 4th Edition
Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in
the accompanying table.

a. What is the opportunity cost of producing a car in Saudi Arabia? In the United States? What is the opportunity cost of producing a barrel of oil in Saudi Arabia? In the United States?
b. Which country has the comparative advantage in producing oil? In producing cars?
c. Suppose that in autarky, Saudi Arabia produces 200 million barrels of oil and 3 million cars; similarly, that the United States produces 300 million barrels of oil and 2.5 million cars. Without trade, can Saudi Arabia produce more oil and more cars? Without trade, can the United States produce more oil and more cars? Suppose now that each country specializes in the good in which it has the comparative advantage, and the two countries trade. Also assume that for each country the value of imports must equal the value of exports.

Saudi Arabia United States Quantity of oil (millions of Quantity of oil Quantity of(millions of Quantity of barrels) cars (millions)barrels) cars (millions) 200 400 600 800 100 200 300 400 10.0 7.5 5.0 2.5

Explanation / Answer

(a) Opportunity Cost (OC)

OC of producing 1 car, Saudi Arabia = (800 / 4) = 200 barrels of Oil

OC of producing 1 car, US = (400 / 10) = 40 barrels of Oil

OC of producing 1 barrel of oil, Saudi Arabia = (4 / 800) = 0.005 cars

OC of producing 1 barrel of oil, US = (10 / 400) = 0.025 cars

(b)

US can produce cars at a lower OC than Saudi Arabia (40 < 200), so it has comparative advantage in car.

Saudi Arabia can produce oil at a lower OC than US (0.005 < 0.025), so it has comparative advantage in oil.

(c)

OC of producing 1 barrel of oil in US = 0.025 million cars

So, OC of producing 300 barrel of oil in US = (300 x 0.025) = 7.5 million cars

So, if US utilizes all resources to produce only cars, it can make (7.5 - 2.5) = 5 million more cars.

OC of producing 1 car in US = 40 barrels of Oil

So, OC of producing 2.5 million cars in US = (40 x 2.5) = 100 million barrels of oil

So, if US utilizes all resources to produce only oil, it will not be able to make current production of oil.

OC of producing 1 barrel of oil in Saudai Arabia = 0.005 million cars

So, OC of producing 200 million barrels of oil in Saudai Arabia = (200 x 0.005) = 1 million cars

So, if Saudi Arabia utilizes all resources to produce only oil, it will not be able to make current production of oil.

OC of producing 1 car in Saudi Arabia = 200 barrels of Oil

So, OC of producing 3 million cars in Saudi Arabia = (200 x 3) = 600 million barrels of oil

So, if Saudi Arabia utilizes all resources to produce only cars, it will be able to make (600 - 200) = 400 million more barrels of oil.

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