13 In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 c

Question

13 In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps or 7 jackets Sue's opportunity cost of producing a cap is cost of producing a cap is jackets jackets and Tessa's opportunity has a comparative advantage in producing caps If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 7 caps, then Select one O a.5.0/10.0/ Tessa/Sue loses but Tessa gains O b. 0.2/0.10/Sue/both Sue and Tessa gain O c. 0.2 / 0.10 / Tessa / both Sue and Tessa gain O d.0.2/0.10/ Sue/Tessa gains but Sue loses O e.5.0/10.0/Sue/ both Sue and Tessa gain

Explanation / Answer

Answer : The correct option is C.

For Sue,

50 caps production looses 10 jackets

1 cap production looses = 10/50 = 0.2 jacket.

Therefore, in producing 1 cap Sue's opportunity cost is 0.2 jacket.

For Tassa,

70 caps production looses 7 jackets

1 cap production looses = 7/70 = 0.10 jacket.

Therefore, in producing 1 cap Tessa's opportunity cost is 0.10 jacket.

As in producing caps Tessa has lower opportunity cost, hence for cap production Tessa has comparative advantage.

Now, Tessa is specialized in producing caps because of comparative advantage.

Again, for Sue,

10 jackets production looses 50 caps

1 jacket production looses = 50/10 = 5 caps

Therefore, in producing a jacket Sue's opportunity cost is 5 caps.

For Tessa,

7 jackets production looses 70 caps

1 jacket production looses = 70/7 = 10 caps.

Therefore, in producing a jacket Tessa's opportunity cost is 10 caps.

As in producing jackets Sue has lower opportunity cost, hence for jacket production Sue has comparative advantage.

Now, Sue is specialized in producing jackets because of lower opportunity cost.

Sue produces 10 jackets because of specialisation and Tessa producers 70 caps because of specialisation. Now in trade,

10 jackets = 70 caps

1 jacket = 70/10 = 7 caps.

According to question, as trade occurs in a condition of 1 jacket for 7 caps, hence both Sue and Tessa gains from trade .

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.