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What the correct answers? View History Bookmarks Window Help courses.aplia.com When a country has a comparative advantage in the production of a good, it means that it sea produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Maldonia and Lamponia. Both countries produce lemons and coffee, each initially (i.e., before specialization and trade) producing 12 million pounds of lemons and 6 million pounds of coffee, as indicated by the grey stars marked with the letter A. 32 28 24 32 28 24 PP 20 16 12 16 12 12, 6 12, 6 0 4 8 12 16 20 24 28 32 LEMONS (Milions of pounds) 048 12 16 20 24 28 32 LEMONS (Millions of pounds)

Explanation / Answer

(a)

Opportunity cost of coffee in Maldonia = 16 / 24 = 0.67

Opportunity cost of Lemon in Maldonia = 24 / 16 = 1.5

Opportunity cost of coffee in Lamponia = 24 / 12 = 2

Opportunity cost of lemon in Lamponia = 12 / 24 = 0.5

So, Maldonia can make coffee at a lower opportunity cost than Lamponia (0.67 < 2), so Maldonia has comparative advantage in coffee.

Lamponia can make lemons at a lower opportunity cost than Maldonia (0.5 < 1.5), so Lamponia has comparative advantage in lemons.

If they both specialize, then Maldonia will make only coffee & Lamponia will make only lemons.

Production of coffee = 24

Production of lemons = 24

(b)

Initial consumption in Maldonia: 12 lemons, 6 coffee.

After specialization, it will produce 24 coffee, therefore able to export (24 - 6) = 18 coffee to Lamponia.

Initial consumption in Lamponia: 12 lemons, 6 coffee.

After specialization, it will produce 24 lemons, therefore able to export (24 - 12) = 12 lemons to Maldonia.

So, after trade:

Maldonia will be able to consume (12 + 12) = 24 lemons, and 6 coffee.

Lamponia will be able to consume (6 + 18) = 24 coffee, and 12 lemons.

Note: After trade cosumption = Before trade consumption + Maximum amount of the good that the other country can export.

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