10. In the table above, assume that before specialization and trade, both countr
ID: 1115568 • Letter: 1
Question
10. In the table above, assume that before specialization and trade, both countries were producing at production possibility C. Now if each country specializes completely according to comparative advantage, what will be the gains from trade?
a. 20 units of coffee and 10 units of sugar
b. 20 units of sugar and 10 units of coffee
c. 10 units of sugar
d. 80 units of coffee and 90 units of sugar
e. 20 units of coffee
Production Possibilities Schedule CountryX Country Y Choice Sugar Coffee Sugar Coffee 200 160 120 80 40 0 0 40 80 120 160 200 100 80 60 40 20 0 0 30 60 90 120 150Explanation / Answer
Answer
the comparative advantage depends on the opportunity cost, the lower opportunity cost country in a product have the comparative advantage
the opportunity cost of B good=quantity of good A/quantity of good B
the opportunity cost of sugar for country Y=150/100=1.5 coffee
and for country X=200/200=1 coffee
so the country X have the comparative advantage in sugar and Y in Coffee
the output after specialization is
country X will produce 200 unit of sugars and country Y will produce 150 unit of coffee
and production before it is at point C
where
the total output of sugar=120+60=180
the total output of coffee=80+60=140
the gain of trade is 20 unit of sugar and 10 unit of coffee
option b
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