Question

Average: /4 Attempts 4. Specialilzation 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 Maldonia and Desonia. Both countries produce lemons and coffee, each initialy (I.e., before specialization and trade) producing 12 million pounds of lemons and 6 million pounds of coffee, as indicated by the grey stars marked with the letter A. Maldonia Desonia 32 T 28 28 24 PF 24 a 20 20 16 9 16 2 12 12 PPF 卒 .

Drop down options:
lemon
coffee
neither coffee nor lemons
both lemons and coffee

Answer 1

Maldonia;

24 millions of coffee = 16 millions of lemon

1 unit of coffee = 16/24 = 0.67 units of lemon

1 unit of lemon = 24/16 = 1.5 units of coffee

Opportunity cost of 1 unit of coffee is 0.67 units of lemon and 1 unit of lemon is 1.5 units of coffee.

Desonia:

12 millions of coffee = 24 millions of lemon

1 unit of coffee = 24/12 = 2 units of lemon

1 unit of lemon = 12/24 = 0.5 unit of coffee

Opportunity cost of 1 unit of coffee is 2 units of lemon and 1 unit of lemon is 0.5 units of coffee.

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Maldonia has comparative advantage in the production of Coffee and Desonia has comparative advantage in the production of Lemon.

After specialization, Maldonia will produce only Coffee and Desonia will produce only Lemon.

1) Total production of coffee = 24 million

2) Total production of lemon = 24 million

With Trade; Maldonia: Coffee = 24 million - 12 million = 12 millions of coffee

Lemon = 0 + 12 million = 12 million

Desonia; Coffee = 0 + 12 million = 12 million

Lemon = 24 million - 12 million = 12 million

False, without trade countries are able to produce combinations which lies on or below PPF.