Question

Question 7 0 out of 10 points Consider the following table Country A Country B Bananas Apples Numbers denote hours to produce 1 unit 4 What are the world's per-unit gain for bananas if Country A and B specialize according to their absolute advantage? What are the world's per-unit gain for apples if Country A and B specialize according to their absolute advantage? In order to answer, ask yourself: (1) Who the absolute advantage at what? (2) If Country A and B specialize according to absolute advantage, who gives up the production of bananas? who gives up the production of Apples? (3) How many units of bananas are gained by the Country specializing in bananas, any time this Country gives up 1 apple? (4) How many units of apples are gained by the Country specializing in apples, any time this Country gives up 1 banana? (5) Finally: the world is composed by Country A and Country B together. To find the world's per-unit gain, sum up gains and what we give up for both Country A and Country B, for both bananas and apples. Selected Answer 4 extra bananas; 2.5 extra apples 4 extra bananas; 2.5 extra apples 1 extra banana; 1 extra apple not enough information 3 extra bananas; 1.5 extra apples Answers

Answer 1

We can see that the country A has absolute advantage at producing bananas (since it takes 1 hour to produce 1 unit of banana as compared to 5 hours by country B). Also, country B has absolute advantage at producing apples (since it takes 2 hours to produce 1 unit of apple as compared to 4 hours by country A).

If countries specialize according to absolute advantage then country A produces bananas and gives up apple production whereas country B produces apples and gives up bananas production.

Now, if country A gives up 1 apple, it can get 4 hours by which it can produce 4 bananas(4*1).

and if country B gives up 1 banana, it can get 5 hours by which it can produce 2.5 apples(2.5*2).

Thus the world gains (4-1) = 3 extra bananas and (2.5-1) = 1.5 extra apples.