Question 1 Australia can produce 36 thousand tonnes of apple or 12 thousand tonn
ID: 1209530 • Letter: Q
Question
Question 1 Australia can produce 36 thousand tonnes of apple or 12 thousand tonnes of orange in a year. During the same one year period, New Zealand can produce 18 thousand tonnes of apple or 18 tonnes of orange.
a. Draw Australia’s and New Zealand’s production possibilities curves for producing apples and oranges. Assume the production possibility curves are linear. (2 Marks)
b. Who has absolute advantage in producing apples? Who has absolute advantage in producing oranges? Explain your reasoning. (2.5 Marks)
c. Who has a comparative advantage in producing apples? Who has comparative advantage in producing oranges? Explain your reasoning. (2.5 Marks)
d. Suppose that both countries are currently producing nine thousand tones of apples and nine thousand tonnes of oranges. Give an example of how both countries can be better off if they specialise in producing one good and then engage in trade. (3 Marks)
Explanation / Answer
Apple Orange
Australia 36,000 12,000
New Zealand 18,000 18,000
b. Who has absolute advantage in producing apples? Who has absolute advantage in producing oranges? Explain your reasoning. (2.5 Marks)
Australia has absolute advantage in producing Apples as it is producing more apples than NEW Zealand
NEW Zealand has absolute advantage in producing oranges as it is producing more oranges than Australia
c. Who has a comparative advantage in producing apples? Who has comparative advantage in producing oranges? Explain your reasoning. (2.5 Marks)
Australia has a comparative advantage in producing apples as the opportunity cost of producing a Apple in Australia is 12,000/36,000 = 1/3 orange which is less than the opportunity cost in New Zealand where opportunity is 12,000/12,000 = 1 orange
New Zealand has a comparative advantage in producing apples as the opportunity cost of producing a Orange in New Zealand is 12,000/12,000 = 1 Apple which is less than the opportunity cost in Australia where opportunity is 36,000/12,000 = 3 Apples
d. Suppose that both countries are currently producing nine thousand tones of apples and nine thousand tonnes of oranges. Give an example of how both countries can be better off if they specialise in producing one good and then engage in trade.
Apple Orange
Before Trade
Australia 9,000 9,000
New Zealand 9,000 9,000
Now suppose they specialize and tade.
Australia produces 36,000 Apple and New Zealand Produces 18,000 Oranges and they exchange 1 Apple for 2 Oranges
Apple Orange
Afteer Trade
Australia 18,000 9,000
New Zealand 18,000 9,000
So, Both countries are better off, after trade.
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