For the next three questions, refer to the production possibilities schedules sh
ID: 1201299 • Letter: F
Question
For the next three questions, refer to the production possibilities schedules shown below: Country Rubber bands Paper Clips A 40 80 B 10 40 37. In country A the opportunity cost (relative price) of one paper clip is: a. 2 rubber bands. b. 1 rubber band. c. 1/2 rubber band. d. 1/4 rubber band. 38. The schedule indicates that: a. country B can produce more rubber bands than country A. b. country A has a comparative advantage in producing rubber band. c. country B can produce more paper clips than country A. d. country A has a comparative advantage in producing rubber band and paper clips. 39. To achieve gains from specialization: a. country A should export rubber bands to country B and import country B's paper clips. b. country A should export paper clips to country B and import country B's rubber band. c. country A should produce both rubber band and paper clips and not trade with country B. d. country B should produce both rubber band and paper clips and not trade with country A.
Explanation / Answer
Country Rubber bands Paper Clips
A 40 80
B 10 40
37) In Country A, 80 Paper Clips = 40 Rubber Bands,
=> 1 Paper Clip = 40/80 Rubber Bands
=> 1 Paper Clips = 1/2 Rubber Bands
So opportunity cost of one paper clip = 1/2 Rubber Bands
Answer is option C
38) In Country A,
Opportunity cost of one paper clip = 40/80 Rubber Bands = 1/2 Rubber Bands
Opportunity cost of one Rubber band = 80/40 Paper Clips = 2 Paper Clips
In Country B,
Opportunity cost of one paper clip = 10/40 Rubber Bands = 1/4 Rubber Bands
Opportunity cost of one Rubber band = 40 / 10 Paper Clips = 4 Paper Clips
As Country A’s opportunity cost is less in than Country B’s in producing Rubber Bands, thus Country A has the comparative advantage in producing Rubber Bands.
As Country B’s opportunity cost is less in than Country A’s in producing Paper Clips, thus Country B has the comparative advantage in producing Paper Clip
So Answer is Option b, country A has a comparative advantage in producing rubber band.
39)
As Country A has the comparative advantage in producing Rubber Bands and Country B has the comparative advantage in producing Paper Clip, Country A should Export Rubber Band and import paper clip and Country B should export Paper Clip and import Rubber Band
So the answer is option a, country A should export rubber bands to country B and import country B's paper clips