Question

OD) should raise the price at the current output level. Question 3 (Mandatory) (3 points) If the marginal revenue product of the sixth worker is $2 and the marginal resource cost of the sixth worker is $4, then the sixth worker should be employed. True False Question 4 (Mandatory) (5 points) Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. Which of the following statements is true? O A) Alpha should export to Beta, but Beta should not export to Alpha. B) Since Alpha has an absolute advantage in both goods, no mutual gains from trade are possible. c) If Alpha specializes in growing oranges and Beta specializes in growing apples, they could both gain by specialization and trade. D) If Alpha specializes in growing apples and Beta specializes in growing oranges, they could both gain by specialization and trade.

Answer 1

Question 3

False

Marginal revenue product is the additional revenue generated from employing an extra unit of labor. Marginal resource cost is the additional cost incurred from employing an extra unit of labor. Thus, when the additional revenue generated from an extra unit of worker ($2) is less than the cost incurred for employing that worker ($4) then that unit of the worker should not be employed. Thus, here the sixth worker should not be employed.

Question 4

Option D is correct - If Alpha specializes in growing apples and Beta specializes in growing oranges, they could both gain by specialization and trade.

Absolute advantage theory means that one firm, individual, or country might have an absolute advantage in the production of one good comparative to another firm, individual, or country. This happens when a firm, individual, or country can produce a greater quantity of some good as compared to another firm, individual, or country given the same amount of resources.

On the other hand, comparative advantage theory states that only one country can have a comparative advantage in the production of a good. Only that firm, individual, or country has a comparative advantage in producing a good in which it has lower opportunity cost than other firms, individuals, or countries. Opportunity cost is the cost of giving something up for getting something else in return.

A person might have an absolute advantage in producing both goods but it cannot have a comparative advantage in both the goods. We can see this by the following example:

Here, we can see that Alpha has an absolute advantage in producing both oranges and apples since it can produce 18 units of oranges and 9 units of apples using the same resources as Beta which can only produce 16 units of oranges and 4 units of apples.

	Oranges	Apples
Alpha	18	9
Beta	16	4

Now, we will calculate the opportunity cost of producing goods by Alpha and Beta:Now based on the absolute advantage theory we cannot decide which country will specialize in which goods and trade it in the international market since Alpha has an absolute advantage in producing both the goods.

Opportunity cost (OC) of producing oranges by Alpha = 9/18 = 1/2

Opportunity cost (OC) of producing apples by Alpha = 18/9 = 2

Opportunity cost (OC) of producing oranges by Beta = 4/16 = 1/4

Opportunity cost (OC) of producing apples by Beta = 16 / 4 = 4

Thus, we can see that Beta has a lower opportunity cost in producing oranges as compared to Alpha (1/4<1/2) and Alpha has a lower opportunity cost in producing apples as compared to Beta (2<4)

By the theory of comparative advantage we can say that since Beta has lower opportunity cost in producing oranges, it will specialize in orange production and trade it in the international market. And, since Alpha has a lower opportunity cost in producing apples, it will specialize in the production of applesand trade apples in the international market.