In a day of production, firms in Angola can produce 200 liters of oil or 100 kil
ID: 1249349 • Letter: I
Question
In a day of production, firms in Angola can produce 200 liters of oil or 100 kilograms of tungsten. Firms in Namibia can produce 160 liters of oil or 60 kilograms of tungsten. Which country has:comparative advantage in tungsten
absolute advantage in oil
comparative advantage in oil
and what is the maximum price the country with the comparative advantage in tungsten is willing to pay for a liter of oil in terms of tungsten and what is the minimum price the country with the comparative advantage in tungsten is willing to pay for a liter of oil in terms of tungsten.
Explanation / Answer
Angolans Production possibilities:
1 day: 200 liters oil or 100 kg T
If all the resources of Angola is used in a day it can produce either 200 lit of oil or 100kgs of Tungsten.
So, 200 lit Oil= 100 Kg T in Angola
Opportunity cost of tungsten:
Opportunity cost of Tungsten in Angola= 200/100 Oil
= 2 Oil
Opportunity cost of oil in Angola= 100/200 kg of T
= 0.5 T
Namibian Production possibilities:
1 day: 160 liters oil or 60 kg T
If all the resources of Namibia is used in a day it can produce either 160 lit of oil or 60kgs of Tungsten.
So, 160 lit Oil= 60 Kg T in Namibia
Opportunity cost of tungsten:
Opportunity cost of Tungsten in Namibia = 160/60 Oil
= 2.66 Oil
Opportunity cost of oil in Namibia = 60/160 kg of T
= 0.375 T
Comparative advantage in tungsten:
The country having the lowest opportunity cost has the comparative advantage in producing a particular product.
Opportunity cost of Tungsten in Namibia = 2.66 Oil
Opportunity cost of Tungsten in Angola= 2 Oil
Angola is having lower opportunity cost for producing Tungsten, so Angola should specialize in producing tungsten.
Absolute advantage in oil:
Angola can produce 200 liters in a day, where as Namibia can produce only 160 liters, So, Angola will have absolute advantage.
Comparative advantage in oil:
The country having the lowest opportunity cost has the comparative advantage in producing a particular product.
Opportunity cost of oil in Namibia = 0.375 of T
Opportunity cost of oil in Angola= 0.5 of T
We can see that opportunity cost of producing oil is less in Namibia, So Namibia has the comparative advantage and it should specialize in oil production.
Opportunity cost of oil in Angola= 0.5 of T
So the minimum price it can pay is 0.375 T and the maximum price it can pay is 0.5 T