Suppose labor productivity differences are the only determinants of comparative
ID: 1207329 • Letter: S
Question
Suppose labor productivity differences are the only determinants of comparative advantage, and Brazil and Chile both produce only coffee and sugar. In Chile, either 5 units of coffee or 2 units of sugar can be produced in one day. In Brazil, a day of labor produces either 2 units of coffee or 1 unit of sugar.
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Solution
Refer to Scenario 20.1. Which of the following statements is true?
Chile has a comparative advantage in producing both coffee and sugar.
Brazil has a comparative advantage in producing both coffee and sugar.
Neither Chile nor Brazil has a comparative advantage in producing coffee.
Brazil has a comparative advantage in producing sugar.
Brazil has a comparative advantage in producing coffee.
Suppose labor productivity differences are the only determinants of comparative advantage, and Brazil and Chile both produce only coffee and sugar. In Chile, either 5 units of coffee or 2 units of sugar can be produced in one day. In Brazil, a day of labor produces either 2 units of coffee or 1 unit of sugar.
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Solution
Refer to Scenario 20.1. Which of the following statements is true?
a.Chile has a comparative advantage in producing both coffee and sugar.
b.Brazil has a comparative advantage in producing both coffee and sugar.
c.Neither Chile nor Brazil has a comparative advantage in producing coffee.
d.Brazil has a comparative advantage in producing sugar.
e.Brazil has a comparative advantage in producing coffee.
Explanation / Answer
Option (d).
Let us compute opportunity costs (OC).
In Brazil,
OC of coffee = 1/2 = 0.5 Sugar
OC of sugar = 2/1 = 2 coffee
In Chile,
OC of coffee = 2/5 = 0.4 sugar
OC of sugar = 5/2 = 2.5 coffee
Since Chile can produce coffee at a lower OC than Brazil can, Chile has comparative advantage in coffee and Brazil has comparative advantage is sugar.