Assume that Aruba and Iceland can switch between producing coolers and producing

Question

Assume that Aruba and Iceland can switch between producing coolers and producing radios at a constant rate.

Labor Hours

Needed to Make 1

Cooler

Radio

Aruba

4

10

Iceland

2

8

Iceland should specialize in the production of

a.

Radios and Aruba should specialize in the production of coolers.

b.

Coolers and Aruba should specialize in the production of radios.

c.

both goods and Iceland should specialize in the production of neither good.

d.

neither good and Iceland should specialize in the production of both goods.

Labor Hours

Needed to Make 1

Cooler

Radio

Aruba

4

10

Iceland

2

8

Explanation / Answer

Ans is B

Opportunity cost of 1 Cooler in Aruba =0.4 radio

Opportunity cost of 1 Cooler in Iceland=0.25 radio

Thus Iceland should specialize in production of Cooler and Aruba should specialise in Radio

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