Multiple Choice
Which statement best describes the relationship between production costs and comparative advantage?
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2. Introductory Economic Models
PPF - Comparative Advantage and Absolute Advantage
Multiple Choice
Suppose Country A can produce 10 pastries or 5 cakes per day, and Country B can produce 8 pastries or 4 cakes per day. Who has the comparative advantage in selling pastries?
A
Neither country has a comparative advantage
B
Both countries have the same comparative advantage
C
Country A
D
Country B
Verified step by step guidance1
Identify the opportunity cost of producing pastries in each country. The opportunity cost is what you give up to produce one more unit of a good.
For Country A, calculate the opportunity cost of producing one pastry by dividing the number of cakes forgone by the number of pastries produced: \(\text{Opportunity Cost}_{A} = \frac{5 \text{ cakes}}{10 \text{ pastries}}\).
For Country B, calculate the opportunity cost of producing one pastry similarly: \(\text{Opportunity Cost}_{B} = \frac{4 \text{ cakes}}{8 \text{ pastries}}\).
Compare the opportunity costs of producing pastries between the two countries. The country with the lower opportunity cost has the comparative advantage in producing pastries.
Conclude which country has the comparative advantage in pastries based on the lower opportunity cost calculated.
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