Question

Suppose that in Australia, it takes two hours of labor to harvest 20 bushels of apples and three hours of labor to harvest 20 bushels of tomatoes. Further, suppose that in Brazil it takes three hours of labor to harvest 20 bushels of apples and five hours of labor to produce 20 bushels of tomatoes. I. Compute the opportunity cost per unit for each good in both countries. 2. Summarize the results in an appropriate table 3. Which of the following statements is TRUE? a. Of these two countries, Brazil has a comparative advantage in producing tomatoes. b. Of these two countries, Brazil has a comparative advantage in producing apples. c. Brazil has an absolute advantage in producing both goods. d. In trade between these two countries, Australia would gain and Brazil would lose. 4. Justify your answer. 5. What would be the specialization structure if the two countries were asked to trade?

Answer 1

1.

Opportunity cost per unit for apples in Australia is:

$\frac{Hours Taken To Harvest 20 Bushels Of Apple In Australia}{Hours Taken To Harvest 20 Bushels Of Apple In Brazil} =\frac{2}{3}=0.67$

Similarly, opportunity cost per unit for tomatoes in Australia is:

$\frac{Hours Taken To Harvest 20 Bushels Of Tomato In Australia}{Hours Taken To Harvest 20 Bushels Of Tomato In Brazil} =\frac{3}{5}=0.6$

Similarly, opportunity costs for Brazil for apple is 1.5 and for tomato is 1.67

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2.

The results are summarized as follows:

	Apples	Tomato
Australia	0.67	0.6
Brazil	1.5	1.67

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3.

The correct answer is option b. Brazil has comparative advantage in producing apples.

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4.

As we can see, the opportunity cost for both the goods is high in Brazil, therefore, option c is incorrect. Now, since opportunity cost is relatively low for producing tomatoes in Australia, thus, Australia should produce tomatoes and Brazil should produce apples. Thus, Australia has a comparative advantage in producing tomatoes and Brazil in apples. Also, from trade, both the countries will benefit.

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5. If both the countries were asked to trade, then Australia will produce tomatoes in 3 hours and will export tomatoes to Brazil. On the other hand, Brazil will produce apples in 3 hours and will export apples to Australia.