Question

Lance can produce either 20 hats or 30 gloves per day. Amy can produce either 15 hats or 5 gloves per day. Lance’s opportunity cost of producing 1 hat is                            [ Select ]                       ["20", "0.67", "30", "1.5"]         gloves.                            [ Select ]                       ["Both of them", "Amy", "Lance", "None of them"]         has comparative advantage in producing hats. The mutually beneficial division of labour should be that                            [ Select ]                       ["Lance specialize in making hats and Amy specialize in making gloves", "Lance specialize in making gloves and Amy specialize in making hats", "Both specialize in making hats", "Both specialize in making gloves"]         . A possible terms of trade so they can mutually gain from the trade is

Answer 1

From the information provided we conclude that

The opportunity cost of producing one hat by Lance is 30/20 or 1.5 gloves.

The opportunity cost for Amy is 5/15 = 0.33 gloves.

This shows that Amy as comparative advantage in the production of hat. However Lance is able to produce more of both the goods

Therefore Lance should specialise in making gloves and any should specialise in making hats.

Terms of trade should lie between the two opportunity costs. Therefore terms of trade should lie between 0.33 gloves to 1.5 gloves.