Suppose the United States and Mexico both produce hamburgers and tacos. The comb

Question

Suppose the United States and Mexico both produce hamburgers and tacos. The combinations of the two goods that each country can produce in one day are presented in the table below. Which country has an absolute advantage in producing tacos? Which country has a comparative advantage in producing tacos? Suppose the United States is currently producing 40 tons of hamburgers and 18 tons of tacos and Mexico is currently producing 4 tons of hamburgers and 10 tons of tacos. If the United States and Mexico each specialize in producing only one good (the good for which each has a comparative advantage), then a total of additional ton(s) of hamburgers can be produced for the two countries combined (enter a numeric response using an integer)

Explanation / Answer

US can produce maximum 54 tacos or maximum 60 hamburgers. Mexico can produce maximum 30 tacos or maximum 6 hamburgers.

(1) Since US can produce more tacos than Mexico can (54 > 30), US has absolute advantage in tacos.

(2)

Opportunity cost of taco in US = 60/54 = 1.11 hamburgers

Opportunity cost of taco in Mexico = 6/30 = 0.2 hamburgers

Since Mexico can produce taco at lower opportunity cost (0.2 < 1.11), Mexico has comparative advantage in taco.

(3) As per law of comparative advantage, Mexico will produce only taco (30 taco) and US will produce only hamburgers (60 hamburgers)

Additional hamburgers produced = 60 - (40 + 4) = 60 - 44 = 16 tons

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