1)Refer to the above graphs and information. If the countries shown above should
ID: 1223111 • Letter: 1
Question
1)Refer to the above graphs and information. If the countries shown above should trade, which chemical/steel price ratio is most likely to prevail?
A)1 ton of chemicals/1 ton of steel
B) 9 tons of chemicals/5 tons of steel
C) 2 tons of chemicals/ 1 ton of steel
D) 5 tons of chemicals/ 2 tons of steel
2)Refer to the above graphs and information. The assumption made about the domestic opportunity costs in countries A and B is that they are:
A) constant b) variable c) increasing d) decreasing
3)Refer to the above graphs and information. It can be seen that:
A)country A has a comparative advantage in both commodities.
B)country B can produce more of both goods than A
C) Country B has a comparative advantage in chemicals
D) it is most costly in terms of resources to produce steel in country A
Suppose the world economy is composed of just two countries: Aand B. Each can produce steel or chemicals, but at different levels of economic efficiency. The domestic productive possibilities curves are shown in the graphs below. S teel (milli ons of tons) S teel (millions of tons) 30 30 Country As production possibilities Country B's production possibilities 20 20 10 10 0 10 20 30 40 50 Chemicals (millions of tons) 0 10 20 30 40 50 Chemicals (milions of tons)Explanation / Answer
1. Option B) 9 tons of chemicals/5 tons of steel
If A produces 30 units of steel then it must sacrifice 50 units of Chemical. It's opportunity cost of producing a unit of steel = 50/30 = 1.67 units of Chemicals
Like wise opportunity cost of producing a unit of steel of B is 2 units of Chemicals.
Now, for trade to prevail it must be the case that the country with the lowest opportunity cost must produce the steel - in this case it is A.
But, A must get a chemical/steel price ratiothat is higher than 1.67 units of Chemicals. For B to be a part of the international trade, this chemical/steel price ratio must be less than 2. Only option B = 1.8 satisfies this criterion.
2. A) constant
It can be checked that the production possibility curves are straight lines and downward sloping. That is rate of change which is also the opportunity costs remains constant.
3. C) Country B has a comparative advantage in chemicals
From part 1, we know that country A has comparative advantage in steel. Taking inverse of the opportunity costs of producing a unit of chemicals (expressed in terms of steel), we can see that country B has comparative advantage in chemicals.
Country A: Opportunity cost of one unit of chemicals = 30/50 = 0.6 units of steel
Country B: Opportunity cost of one unit of chemicals = 20/40 = 0.5 units of steel
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