Suppose that the fictitious nations of North Orange and South Blue have the unit

Question

Suppose that the fictitious nations of North Orange and South Blue have the

unit labor requirements for producing steel

and brooms shown in the table below:

Unit labor Country

requirements

Goods: N. Orange    S. Blue

Steel         (3); (8);

Brooms     (2);    (1);

a. The opportunity cost to N. Orange of producing 1 broom is ______ steel. (Fill in the blank for .25 of a point.)

b. The opportunity cost to S. Blue of producing 1 broom is _____ steel. (Fill in the blank for .25 of a point.)

c. Which country has a comparative advantage in brooms? __________ (Fill in the blank for .25 of a point.)

d. Which country has a comparative advantage in steel? (Fill in the blank for .25 of a point.)

Explanation / Answer

Ans

labour requirement opportunity cost

country steel broom steel Broom

N.Orange 3 2 3/2 = 1.5 2/3 = 0.67

S.Blue 8 1 8/1 = 8 1/8 = 0.125

a)The opportunity cost of good A is defined as amount of other good ,B, that has to be given up to produce additional unit of good A. The opportunity cost for N.Orange to produce 1 broom is 0.67.

b) The opportunity cost to produce 1 broom for S.Blue is 0.125.

c) The country that has lower opportunity cost in producing a good has a comparative advantage in it. S.Blue has lower opportunity cost in producing brooms as 0.125<0.67. Thus, S.Blue has comparative advantage in producing brooms.

d) N.Orange has comparative advantage in producing steel as opportunity cost is lower for it i.e 1.5 < 8.

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