Question
Country A can produce 10 units of cloth or 20 units of
wheat per day. Country B can produce 15 units of cloth or 15 units of wheat per day. Which of the following statements is true?Solution
To determine comparative advantage, we need to compare the opportunity costs. For Country A: Opportunity cost of 1 unit of cloth = 2 units of wheat (since 10 cloth = 20 wheat). Opportunity cost of 1 unit of wheat = 0.5 units of cloth. For Country B: Opportunity cost of 1 unit of cloth = 1 unit of wheat. Opportunity cost of 1 unit of wheat = 1 unit of cloth. Since the opportunity cost of producing wheat is lower in Country A (0.5 units of cloth) compared to Country B (1 unit of cloth), Country A has a comparative advantage in producing wheat.
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