Question

1. Which of the following is true?

A. A nation can have a comparative advantage in the production of a good only if it also has an absolute advantage.

B. A nation can have a comparative advantage in the production of every good, but not an absolute advantage.

C. A nation cannot have an absolute advantage in the production of every good.

D. A nation cannot have a comparative advantage in the production of every good.

2. The fictional country of Anastialia is a small country with rich resources in minerals. In an 8 hr work day it can produce 100 pounds of silver or 50 pounds of copper. If Anastialia decides to produce copper instead of silver it is ignoring the fact that its silver production has a (n)________ to copper.

A. production advantage

B. absolute advantage

C. comparative advantage

Answer 1

1.D

Absolute advantage means that a country can produce a good more efficiently i.e. using less resources than the other country. For example, if Mexico can produce a bag of rice using 10 labor hours and Bangladesh can produce one bag of rice using 5 labor hours we can safely conclude that Bangladesh had absolute advantage in the production of rice since it uses less labor hours than Mexico per bag of rice.

The principle of Comparative Advantage states that a country will produce the goods which it can produce most efficiently. The country will have lower opportunity cost in the production of those goods.

B is wrong because a country cannot have a comparative advantage in the production of every good.

C is wrong because a country can have absolute advantage in the production of every good.

2.

One pound of silver equals 50/100 pounds of copper or 0.5 pound of copper.

One pound of copper is 100/50 pounds of silver or 2 pounds of silver.

Comparatiave advantage.

Because to produce one pound of silver it has to give up 1/2 pound of copper, whereas, to produce one pound of copper it has to give up 2 pounds of silver. So it has a comparative advantage in the production of silver.