Candy aLc1 hour per pound aLC 5 hours per pound aLcnumber of labor hours needed

Question

Candy aLc1 hour per pound aLC 5 hours per pound aLcnumber of labor hours needed to produce a unit of candy in Home aw number of labor hours needed to produce a unit of wine in Home Wine aLw 3 hours per galon aLW 4 hours per gallon Home Foreign where: number of labor hours needed to produce a unit of candy in Foreign; LC a wnumber of labor hours needed to produce a unit of wine in Foreign; LW Pc the price per pound of candy on world markets; Pw the price per gallon of wine on world markets. Which of the following statements is true? OA. Home specializes in the production of wine O B. Foreign specializes in the production of candy and wine. C. Foreign specializes in the production of wine. O D. Home specializes in the production of candy and wine Suppose that Foreign uses an hour of labor to produce wine and then trades that output for candy. If Pc/Pw 1, through trade Foreign can gain O A. 1 pound of candy B, C, 0.200 pounds of candy 0.050 pounds of candy D. 0.25 pounds of candy

Explanation / Answer

For home country:

Opportunity cost of producing candy is 1/3

Opportunity cost of producing wine is 3

Home country has comparative advantage in producing candy as its opportunity cost is less so it specialises in producing candy.

For foreign country:

Opportunity cost of producing candy is 5/4

Opportunity cost of producing wine is 4/5

Therefore it has comparative advantage on producing wine so it specialises in producing wine.

Answer 1- C- Foreign specialises in producing wine

2-B- 0.200 pounds of candy.

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