Econ Micro (book Only)
6th Edition
ISBN: 9781337408066
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 19, Problem 2P
To determine
The reason of
Concept Introduction
Absolute advantage: It is the advantage of a country to produce a good or service at a per unit cost that is lower than that of another country that produces the same good or service.
Comparative advantage: It is the ability of a country to produce goods and services at an
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Greece and Italy both produce olive oil and cheese. With the same amount of labour Greece produces 15,000 tonnes of cheese per year and 12,000 barrels of olive oil and Italy produces 25,000 tonnes of cheese and 15,000 barrels of olive oil. Determine and explain the comparative advantage for each country. (Show your working)
(Figure: The Production Possibility Frontiers for Kansas and Wisconsin) Use Figure: The Production Possibility
Frontiers for Kansas and Wisconsin. In autarky, Kansas produces and consumes 30 gallons of milk and 80
bushels of corn, while Wisconsin produces and consumes 80 gallons of milk and 60 bushels of corn. If the two
states engage in trade, with each state specializing in the good in which it has a comparative advantage, world
production of milk will:
Kansas
Wisconsin
Corn
(bushels)
Corn
(bushels)
225
225
2004
200
175
175
150
150
125
125
100
100
75
75
50
50
25
1
0 25 50 75 100 125 150 175 200
25 50 75 100 125 150 175 200
Milk (gallons)
Milk (gallons)
OO
decrease by 30 gallons.
increase by 90 gallons.
increase by 120 gallons.
remain constant.
ॐ ४
25
0
b. Kelen and Chris produce rice and wheat. In an hour, Kelen can produce 1 unit of wheat or
one unit of rice, while Chris can produce 2 units of wheat and 3 units of rice. They each
work 10 hours a day. (8.75)
i.
Who has an absolute advantage in producing wheat? Who has an absolute advantage
in producing rice? Explain.
ii.
Who has comparative advantage in producing wheat? Who has Comparative
advantage in producing rice? Draw a production possibilities frontier for Kelen and
Chris assuming that each spends same number of hours each day as the other in
producing wheat and rice.
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- In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell?arrow_forward(Figure: The Production Possibility Frontiers for Kansas and Wisconsin) Use Figure: The Production Possibility Frontiers for Kansas and Wisconsin. In autarky, Kansas produces and consumes 30 gallons of milk and 80 bushels of corn, while Wisconsin produces and consumes 80 gallons of milk and 60 bushels of con. If the two states engage in trade, with cach state specializing in the good in which it has a comparative advantage, world production of milk will: Kansas Wisconsin Corm Corn (bushels) (bushels) 225 225 200 200 175 175 150 150 125 125 100 100 75 75 50 50 25- 25- 25 50 75 100 125 150 175 200 25 s0 75 100 125 150 175 200 Milk (gallons) MIlk (gallons) decrease by 30 gallons. increase by 90 gallons. increase by 120 gallons. remain constant.arrow_forwardTerms of trade Suppose that Greece and Austria both produce oil and wine. Greece’s opportunity cost of producing a bottle of wine is 4 barrels of oil, while Austria’s opportunity cost of producing a bottle of wine is 10 barrels of oil. By comparing the opportunity cost of producing wine in the two countries, you can tell that ______(Greece / Austria) has a comparative advantage in the production of wine, and ______(Greece / Austria) has a comparative advantage in the production of oil. Suppose that Greece and Austria consider trading wine and oil with each other. Greece can gain from specialization and trade as long as it receives more than _______(1/4barrel / 1/10barrel / 1barrel / 4barrels / 10barrels) of oil for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _______(1/4barrel / 1/10barrel / 1barrel / 4barrels / 10barrels) of wine for each barrel of oil it exports to Greece. Based on answers…arrow_forward
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