Comparative Advantage Questions

Comparative Advantage

ECON 1013

Fall 2011

1. Figure 1 shows the PPFs for two countries that produce food and clothing.

Clothing Clothing

A C

0 Country 1

B

Food

0 Country 2

D

Food

Figure 1: PPFs in Country 1 and Country 2 (a) Under what condition does Country 1 have an absolute advantage in food production? (b) Under what condition does Country 1 have a comparative advantage in food production? (c) If AD < BC, both countries trade with each other, and complete specialization occurs, what quantity of food and clothing is produced by Country 1? (d) If AD < BC, both countries trade with each other, and complete specialization occurs, what quantity of food and clothing is produced by Country 2? (e) If AD = BC which country specializes in food production? 2. In one day, Scott’s farm can produce and sell 8 chickens or 8 pigs while Aiden’s farm can produce and sell 10 chickens or 60 pigs. (a) Draw, with chickens on the horizontal axis, the production possibilities frontier for both farms. Who has the absolute advantage in each good? The comparative advantage? (b) If both farms produce 5 chickens, what is the total opportunity cost of 10 chickens? If specialization occurs, what is the total opportunity cost of 10 chickens? 3. England produces both wheat and corn, and its ppf is c + 2w = 400. Germany also produces wheat and corn but the ppf in Germany is c + 3w = 900. Assume each country devotes half of its resources to producing each commodity. (a) How much of each good is produced in each country? (b) Now let each country produce such that all gains from specialization are realized. If, for some reason, wheat production was held at the same level as the total level above, what is the increase in corn production?

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