Question

Attempts Keep the Highest:14 4. Specialization and trade When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Candonia and Sylvania. Both countries produce grain and tea, each initialy (i.e., before specialization and trade) producing 24 million pounds of grain and 12 million pounds of tea, as indicated by the grey stars marked with the letter A Candonia Sylvania 64 64 56 56 48 40 꾜 24 PP 16 40 32 24 16 0 816 24 32 4048 55 64 GRAIN (Millions of pounds) 816 24 32 40 48 5664 GRAIN (Mions of pounds)

Answer 1

Country F's opportunity cost of producing 48 million pounds of lemon is 24 million pounds of sugar. This means that Country F's opportunity cost of producing 1 pound of lemon is 0.50 24/48) pounds of sugar Country S's opportunity cost of producing 32 million pounds of lemon is 48 million pounds of sugar. This means that Country S's opportunity cost of producing 1 pound of lemon is 1.50 48/32) pounds of sugar. Since the opportunity cost of producing 1 pound of lemon is lower in the case of Country F, Country F has comparative advantage in the production of lemon. Since mathematically it is impossible for one country to have comparative advantage in the production of both the goods, Country S has comparative advantage in the production of sugar If Country F specializes in the production of lemon and Country S specializes in the production of sugar, the two countries can produce a total of 48 million pounds of lemons and 48 million pounds of sugar Without specialization but no trade, Country F has 48 million pounds of lemons but zero sugar, and Country S has 48 million pounds of sugar but no lemons. This means that if country decide to trade 8 million pounds of sugar for 8 million pounds of lemons, Country F will have 40 (= 48-8) million pounds of lemons and 8 million pounds of sugar, and Country S will have 8 million pounds of lemons and 40 (- 48 -8) million pounds of sugar The after-trade consumption bundles of the two countries are shown in the following figures Country F Country S 64 64 56 56 48 、PPF 40 32 24 16 16 8 に +- 0 8 624 3240 48 56 64 0 8 16 24 32 40 48 56 64 LEMONS (Milions of pounds) LEMONS (Milions of pounds) Since the after-trade consumption bundle of each country lies outside of its production possibilities frontier, one knows that the two countries would have not been able to consume at the after-trade consumption bundle. Hence, the given statement is Fals