Please answer 3 The United States and Mexico can both produce oil and cars. The US can produce amaximum of 15,000 barrels of oil or 20,000 cars. Mexico can produce a maximum of8,000 barrels of oil or 12,000 cars. The US and Mexico have an open trade policy for carsand oil.1. Calculate the opportunity costs for oil and cars for both countries.2. Explain who should specialize in producing oil and who should specialize in producingcars.3. Susan argues that since the US can produce more of both goods, it is better for theUS to produce both goods domestically and not trade with Mexico. Using the ideas ofabsolute and comparative advantage explain if Susan is correct or not.

Answered: The United States and Mexico can both…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please answer 3

The United States and Mexico can both produce oil and cars. The US can produce a
maximum of 15,000 barrels of oil or 20,000 cars. Mexico can produce a maximum of
8,000 barrels of oil or 12,000 cars. The US and Mexico have an open trade policy for cars
and oil.
1. Calculate the opportunity costs for oil and cars for both countries.
2. Explain who should specialize in producing oil and who should specialize in producing
cars.
3. Susan argues that since the US can produce more of both goods, it is better for the
US to produce both goods domestically and not trade with Mexico. Using the ideas of
absolute and comparative advantage explain if Susan is correct or not.

Expert Solution

Step 1: Defining opportunity cost

Opportunity cost is the value of the next best alternative that must be given up when a choice is made. To calculate it, we need to find out how much of one good must be sacrificed to produce an additional unit of the other good.

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