Question

L4 X-150 Y 150 Y-300 150 ol Mexico Canada ov 1. The production possibility frontiers of two countries are represented on the graph:s above as straight lines. Let Good X be units of oil (100,000's of barrels) and Good Y be units of automobiles (100,000's of cars). Mexico is currently producing and consuming the goods combination represented by Point A. Canada is currently producing and consuming the goods combination represented by Point B a. Does either country have an absolute advantage in production? Explain. b. Which country has a comparative advantage in the production of oil (Good X)? Which has a comparative advantage in the production of automobiles (Good Y)? Explain and show your work. Would the two countries find it mutually beneficial for Mexico to trade 20 units of auto's (good Y) to Canada in return for Canada sending 10 units of oil (good X) to Mexico? Explain. c.

Answer 1

a. Mexico has an absolute advantage in production of cars and Canada has an absolute advantage in production of oil why because they are able to produce higher quantities within the same period compared to each other
b.Canada has a comparitative advantage in the production of oil as it is able to produce more oil within less time whereas mexico has comparative advantage in production of automobiles as it is able to produce more no of cars. This can be inferred from opportunity cost for each country for producing different goods
  
particulars oil    cars opp cost of producing one unit of oil opp cost of producing one unit of car
mexico   25 300 12(300/25) 0.0833(25/300)
canada   150 150 1(150/150) 1(150/150)

from the above data canada has a lower opportunity cost of producing oil and mexico has a lower opportunity cost of producing cars

c. It would be benficial for mexico to trade 20 units of cars(autos) to canada in return for canada sending 10 units of oil why because the opportunity cost of producing 10 units of oil for mexico would be 120(10*12) whereas the opportunity cost borne for getting oil would be 1.67(20*0.0833). As the net benefit to mexico is higher it is benficial to mexico.
also the cost of producing 20 autos would be 20 wheraes the cost foregone to get 20 cars would be 10(10*1),herealso there is anetsaving in cost . Hence it is is mutually benefocial.