Assignment4 The following hypothetical production possibilities tables are for C
ID: 1155692 • Letter: A
Question
Assignment4 The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative B and for the United States is alternative U China Production Possibilities A B C DE F Product Apparel (in thousands 30 24 18 12 6 0 U.S. Production Possibilities Product Apparel (in thousands 10 8 6 42 0 Chemicals (in tons) a. Are the comparative-cost conditions such that the two areas should specialize? If so, what product should each produce? 0 48 12 16 20 b. What is the total gain in apparel and chemical output that would result from specialization? c. Explain why this illustration allows you to conclude that specialization according to comparative advantage results in more efficient use of world resources.Explanation / Answer
China can produce maximum 30,000 apparel or 30 ton chemicals, while US can produce maximum 10,000 apparel or 20 ton chemicals.
(A) We compute Opportunity Cost (OC) as follows.
In China,
OC of Apparel = 30/30,000 = 0.001 ton Chemical.
OC of Chemical = 30,000/30 = 1,000 Apparel
In US,
OC of Apparel = 20/10,000 = 0.002 ton Chemical.
OC of Chemical = 10,000/20 = 500 Apparel
Since China can produce Apparel at a lower OC than US can (0.001 < 0.002), China has comparative advantage in and should specialize in Apparels. Since US can produce Chemical at a lower OC than China can (500 < 1,000), US has comparative advantage in and should specialize in Chemicals. After specialization, China will produce only Apparel and US will produce only Chemical.
Total production of Apparel = 30,000
Total production of Chemical = 20 ton
(B) Before specialization, China produced 24,000 Apparel and 6 ton Chemical. US produced 4,000 Apparel and 12 ton Chemical.
Gain in Apparel = 30,000 - (24,000 + 4,000) = 30,000 - 28,000 = 2,000
Gain in Chemical = 20 - (6 + 12) = 20 - 18 = 2 ton
(C) Since total world production of both Apparel and Chemical is higher when each country specializes in the good in which there is a comparative advantage, it is clear that specialization as per comparative advantage leads to more efficient resource usage.
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