Countries A and B both produce shoes and shirts. The only input is labor, and th
ID: 1226752 • Letter: C
Question
Countries A and B both produce shoes and shirts. The only input is labor, and the table below shows how many hours of labor it takes to produce a unit of each good in the two countries. A unit of shoes means a pair of shoes and a unit of shirts is one shirt.
Hours of Labor Required to Produce One Unit of Each Good
Shoes
Shirts
Country A
7
6
Country B
11
8
The two countries are thinking about trading with each other. The country that has an absolute advantage in producing shoes is(neither country/ country B /country A )
. For producing shirts, the absolute advantage belongs to (neither country/country B/country A)
.The country that has a comparative advantage in producing shoes is (country A/ country B/ neither country/ and the country that has a comparative advantage in producing shirts is)
(country B/ country A /neither country) .Shoes should be traded (i.e., exported) by country B / country A/ neither country), and shirts should be traded (i.e., exported) by
(country B/ neithercountry / country A)
.OPTIONS FOR ANSWERS ARE IN PARENTHASIS
Hours of Labor Required to Produce One Unit of Each Good
Shoes
Shirts
Country A
7
6
Country B
11
8
Explanation / Answer
a. Country A.
Country A requires 7 labour hours to produce 1 pair of shoes. Whereas, Country B requires 11 hours. So A is more efficient than B as it requires less labour hours.
b. Country A.
Again, A takes lesser hours (6) than B (8) and hence is more efficient.
c. Country B.
This is because, for A the opportunity cost of producing shoes is hours of labour given up to produce shirt.
So 7 hours in shoes = 6 hours in shirt.
Or 1 hour in shoe = 6/7 or 0.8571 hours in shirt.
Similarly, the opportunity cost for country B is 11 hours of shoes = 8 hours of shirts.
Or 1 hour of shoe = 8/11 or 0.72 hours of shirt.
So country B has a lower opportunity cost in producing shoes than A. When O.C is lower for producing a good for a country, then that country has comparative advantage in that production of good.
d. Country A.
Opportunity cost of producing shirt for country A is 7/6 or 1.166 hours of labour shoes.
Similarly, O.C for country B is 11/8 or 1.375 hours of labour shoes.
A has lower O.C than B.
e. Country B.
Since B has lower O.C so it should produce and export it.
f. Country A
Again because of lower O.C.