Use the following information to answer questions 6 and 7. Consider a model econ

Question

Use the following information to answer questions 6 and 7.

Consider a model economy with just two individuals, Fred and Wilma. They both like to eat bread and cake. They each bake 10 hours a week. If Wilma spends all her time baking bread, she can bake 5 loaves. If she spends all her time making cakes, she will have 20 cakes. If Fred devotes all his time to bread, he will bake 10 loaves of bread, and if he spends all his time baking cake, he will have 25 cakes.

6. Which of the following statements is NOT true:

1) Wilma has a comparative advantage in cake

2)Wilma has an Absolute advantage in cake

3)Fred has an absolute advantage in bread

4)Fred has a comparative advantage in bread

Explanation / Answer

It has been stated that both Wilma and Fred has 10 hours to bake each week.

If Wilma spends all her 10 hours to bake bread, she can bake 5 loaves. On the other hand, if Fred spends all his 10 hours to bake bread, he can bake 10 loaves of bread.

As Fred can bake more bread than Wilma using same amount of time, he has the absolute advantage in production of bread.

If Wilma spends all her 10 hours to bake cake, she can bake 20 cakes. On the other hand, if Fred spends all his 10 hours to bake cake, he can bake 25 cakes.

As Fred can bake more cake than Wilma using same amount of time, he has the absolute advantage in production of cake.

The opportunity cost for Wilma to bake one loaf of bread is (20/5) 4 cakes. The opportunity cost for Fred to bake one loaf of bread is (25/10) 2.5 cakes. As Fred has lower opportunity cost in production of bread, he has comparative advantage in production of bread.

The opportunity cost for Wilma to bake one cake is (5/20) 0.25 loave of bread. The opportunity cost for Fred to bake one cake is (10/25) 0.4 loaves of bread. As Wilma has lower opportunity cost in production of cake, she has comparative advantage in production of cake.

Hence, the correct answer is option (2)

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