Question

9.(4 points) In Mexico, a worker can produce 80 bushels of corn or 20 bags of coffee. In Costa Rica, a worker can produce 10 bushels of corn or 60 bags of coffee. Coffee (bags) Country Mexico Corn (bushels) 80 or 20 Costa Rica 10 or 60 a. Who has the absolute advantage in the production of corn? b. Who has the absolute advantage in the production of coffee? c. Which country has a comparative advantage in producing corn? d. Which country has a comparative advantage in producing coffee? e. Suppose before trade occurs, each country has 10 workers and produces the values given in the following table: Country Corn production (bushels) Coffee production (bags) Mexico 400 100 Costa Rica 50 300 Then, with a push toward specialization and trade, the countries change production to the following table: Country Mexico Costa Rica Corn production (bushels) 640 Coffee production (bags) 40 20 480 With the information provided above, fill in the table: The Mexican economy, after specialization, will benefit if The Costa Rican economy, after specialization, will benefit it: if it: Exports no more than Imports at least Imports at least Exports no more than

Answer 1

Q9)

(a) Since Mexico can produce more corns per worker (80 > 10), it has an absolute advantage in corn

(b) Since Costa Rica can produce more coffee per worker (60>20), it has an absolute advantage in coffee

(c) Opportunity cost of producing corn in Mexico = 20/80 = 0.25 coffee

Opportunity cost of producing corn in Costa Rica = 60/10 = 6 coffee

Since the opportunity cost of producing corn is lower in Mexico, Mexico has a comparative advantage in corn production.

(d) Opportunity cost of producing coffee in Mexico = 80/20 = 4 corns

Opportunity cost of producing coffee in Costa Rica = 10/60 = 0.17 corn

Since the opportunity cost of producing coffee is lower in Costa Rica, Costa Rica has a comparative advantage in coffee production.