Multiple Choice
Which of the following best describes the difference between absolute advantage and comparative advantage?
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2. Introductory Economic Models
PPF - Comparative Advantage and Absolute Advantage
Multiple Choice
In the context of comparative advantage, if Country A can produce 6 units of good X or 2 units of good Y, and Country B can produce 9 units of good X or 3 units of good Y, are the opportunity cost ratios 6:2 and 9:3 equivalent?
A
No, because the total output levels are different.
B
Yes, both ratios simplify to the same opportunity cost.
C
Yes, but only if the goods are perfect substitutes.
D
No, the ratios represent different opportunity costs.
Verified step by step guidance1
Step 1: Understand the concept of opportunity cost in comparative advantage. The opportunity cost of producing one good is how much of the other good must be given up to produce one unit of the first good.
Step 2: Calculate the opportunity cost of producing good X in terms of good Y for Country A. This is done by dividing the maximum units of good Y by the maximum units of good X: \(\frac{2}{6}\).
Step 3: Calculate the opportunity cost of producing good X in terms of good Y for Country B similarly: \(\frac{3}{9}\).
Step 4: Simplify both ratios to see if they are equivalent. Simplify \(\frac{2}{6}\) and \(\frac{3}{9}\) to their lowest terms and compare.
Step 5: Conclude whether the opportunity cost ratios are equivalent based on the simplified fractions, which reflects if the countries have the same trade-offs between goods.
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