Below is the production possibility information of small nations Arboc and Arbez, which can produce two goods, wheat, and coffee. The maximum quantity of each good is shown in the table below. Assume the two nations trade in a world containing many small nations. Costs are constant within each country.
ARBOC
WHEAT and COFFEE
120 and 0
0 and 30
ARBEZ
WHEAT and COFFEE
120 and 0
0 and 20
1. What is the opportunity cost of one unit of wheat in Arboc?
2. What is the opportunity cost of one unit of wheat in Arbez?
3. Which country has a comparative advantage in the production of wheat?
4. What is the opportunity cost of one unit of coffee in Arboc?
5. What is the opportunity cost of one unit of coffee in Arbez?
6. Which country has a comparative advantage in the production of coffee?
7. Based only on comparative advantage,
Arboc should produce which good?
Arbez should produce which good?
8. The terms of trade are 2 units of wheat per unit of coffee,
Arboc should produce which good?
Arbez should produce which good?
9. The terms of trade are 5 units of wheat per unit of coffee,
Arboc should produce which good?
Arbez should produce which good?
10. The terms of trade are 6 units of wheat per unit of coffee. Which country could not gain from trade?
1. The opportunity cost of one unit of wheat in Arboc can be calculated by comparing the alternative of producing coffee. For Arboc, the opportunity cost of one unit of wheat is given by the ratio of coffee to wheat, which is 0/120, equal to 0.
2. The opportunity cost of one unit of wheat in Arbez can be calculated in the same way. So, for Arbez, the opportunity cost of one unit of wheat is given by the ratio of coffee to wheat, which is 0/120, equal to 0.
3. Comparative advantage in the production of wheat is determined by comparing the opportunity costs of wheat in both countries. Since the opportunity cost of one unit of wheat is lower in Arboc (0) compared to Arbez (0), Arboc has a comparative advantage in the production of wheat.
4. The opportunity cost of one unit of coffee in Arboc can be calculated by comparing the alternative of producing wheat. So, for Arboc, the opportunity cost of one unit of coffee is given by the ratio of wheat to coffee, which is 120/0, undefined or infinite.
5. Similarly, the opportunity cost of one unit of coffee in Arbez can be calculated. So, for Arbez, the opportunity cost of one unit of coffee is given by the ratio of wheat to coffee, which is 120/0, undefined or infinite.
6. Comparative advantage in the production of coffee is determined by comparing the opportunity costs of coffee in both countries. Since the opportunity cost of one unit of coffee is lower in Arbez (0) compared to Arboc (undefined or infinite), Arbez has a comparative advantage in the production of coffee.
7. Based on comparative advantage, Arboc should produce wheat and Arbez should produce coffee. Comparative advantage suggests that countries should specialize in producing goods in which they have a lower opportunity cost.
8. If the terms of trade are 2 units of wheat per unit of coffee, Arboc has a comparative advantage in wheat (lower opportunity cost), so Arboc should produce wheat, and Arbez should produce coffee.
9. If the terms of trade are 5 units of wheat per unit of coffee, Arboc has a comparative advantage in wheat, so Arboc should produce wheat, and Arbez should produce coffee.
10. If the terms of trade are 6 units of wheat per unit of coffee, neither country has a comparative advantage in coffee (since the opportunity cost is undefined or infinite for both countries). In this case, both countries could gain from trade by specializing in the production of their respective comparative advantage good (wheat for Arboc and coffee for Arbez).
1. The opportunity cost of one unit of wheat in Arboc can be calculated by finding the ratio of the foregone production of coffee to the gained production of wheat. In this case, Arboc can produce 0 coffee if they produce 120 wheat. Therefore, the opportunity cost of one unit of wheat in Arboc is 0 coffee.
2. Similarly, the opportunity cost of one unit of wheat in Arbez can be found by comparing the foregone production of coffee to the gained production of wheat. Arbez can produce 0 coffee if they produce 120 wheat. Thus, the opportunity cost of one unit of wheat in Arbez is 0 coffee.
3. To determine which country has a comparative advantage in the production of wheat, we compare the opportunity cost of wheat production in each country. Since both countries have an opportunity cost of 0 for producing one unit of wheat, neither has a comparative advantage in the production of wheat.
4. The opportunity cost of one unit of coffee in Arboc can be calculated by finding the ratio of the foregone production of wheat to the gained production of coffee. Arboc can produce 120 wheat if they produce 0 coffee. Therefore, the opportunity cost of one unit of coffee in Arboc is 120 wheat.
5. Similarly, the opportunity cost of one unit of coffee in Arbez can be found by comparing the foregone production of wheat to the gained production of coffee. Arbez can produce 120 wheat if they produce 0 coffee. Thus, the opportunity cost of one unit of coffee in Arbez is 120 wheat.
6. To determine which country has a comparative advantage in the production of coffee, we compare the opportunity cost of coffee production in each country. Since both countries have an opportunity cost of 120 wheat for producing one unit of coffee, neither has a comparative advantage in the production of coffee.
7. Based on comparative advantage, Arboc should produce the good with a lower opportunity cost, which is wheat. Arbez should produce the good with a lower opportunity cost, which is also wheat.
8. The terms of trade are 2 units of wheat per unit of coffee. In this case, Arboc should specialize in producing wheat since they have a lower opportunity cost for wheat production compared to Arbez. Arbez should specialize in producing coffee since they have a lower opportunity cost for coffee production compared to Arboc.
9. The terms of trade are 5 units of wheat per unit of coffee. In this case, Arboc should specialize in producing coffee since they can potentially gain more wheat per unit of coffee through trade. Arbez should specialize in producing wheat since they can potentially gain more coffee per unit of wheat through trade.
10. The terms of trade are 6 units of wheat per unit of coffee. In this case, both countries can gain from trade. Arboc can gain more wheat per unit of coffee, and Arbez can gain more coffee per unit of wheat. Therefore, both countries could benefit from trade.