Question

Opportunity Costs, Comparative Advantage, & Benefits of Trade

India: USA:

tee shirts: 20 30

   cell phones: 5 15

1. What is India's opportunity cost of producing one cell phone?

2.  What is the USA’s opportunity cost of producing one cell phone?

3. Which country has a "Comparative Advantage" at producing cell phones?

4. & 5. What will be the Maximum & Minimum ‘Price’ for a cell phone (in terms of tee shirts traded)? Minimum Price: ____ Maximum Price: ____

6. List one possible “Price” for cell phone, in terms of tee shirts traded, that would make BOTH India & USA better off: _____

7. 1) Below, draw the two “Production Possibilities Curve” - one for each country, India and USA! Label the axes of the Graphs. Show amounts (maximum Quantities produced of cell phones & tee shirts) along the axes of both graphs. 2)  Point to (or, circle) the good each country will sell (specialize at) on that country's PPC graph - on the axis where the max. quantity of that good is shown.   3) Show they both can move to a position or point OUTSIDE THEIR OWN curve at the “Price” you gave in question 6.  [Draw your 2 graphs neatly and legibly.

8. (1) Victoria works at a hair & nail salon. She can complete 8 nails appointments a day, or 4 hair color appointments a day. What is her "opportunity cost" of 1 hair color appointment? [Give a numberanswer.]

9. (2) Write a short example of an “opportunity cost

Answer 1

Answer

1)

We can see from above table that India can produce with the given resources it can produce 5 cell phones or it can produce 20 t shirts. Hence In order to produce 5 cell phones India has to sacrifice 20 tee shirts. This implies in order to produce 1 cell phone India has to sacrifice 20/5 = 4 tee shirts. This is what we called Opportunity cost of producing 1 cell phone for India.

Hence, Opportunity cost of producing 1 cell phone for India is 4 tee shirts.

2)

We can see from above table that USA can produce with the given resources it can produce 15 cell phones or it can produce 30 t shirts. Hence In order to produce 15 cell phones USA has to sacrifice 30 tee shirts. This implies in order to produce 1 cell phone USA has to sacrifice 30/15 = 2 tee shirts. This is what we called Opportunity cost of producing 1 cell phone for USA.

Hence, Opportunity cost of producing 1 cell phone for USA is 2 tee shirts.

3)

The country with lower opportunity cost will have Comparative Advantage in Producing Cell phones. As calculated in Above parts that Opportunity cost of producing 1 cell phone for India is 4 tee shirts and Opportunity cost of producing 1 cell phone for USA is 2 tee shirts. Hence Opportunity cost of producing cell phone is lower in USA.

Hence USA has comparative advantage in Producing Cell Phones.

4)

As USA has comparative advantage in Producing Cell Phones, hence USA will export. As USA can produce 1 cell phone by sacrificing 2 tee shirts, hence, they can produce 2 tee shirts by sacrificing 1 cell phones. So, USA will export Cell phone for at least 2 tee shirts. Hence, Minimum Price: 2 tee shirts

As India has higher opportunity cost for Producing Cell Phones, hence India will import. As India can produce 1 cell phone by sacrificing 4 tee shirts, hence, they can produce 4 tee shirts by sacrificing 1 cell phones. So, India will import Cell phone for atmost 4 tee shirts. Hence, Maximum Price: 4 tee shirts

Hence, The correct answer is Minimum Price: 2 tee shirts and Maximum Price: 4 tee shirts