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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.

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.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Title: Understanding Opportunity Costs and Comparative Advantage in US-Mexico Trade** The United States and Mexico both have the capability to produce oil and cars. The production capacity for each country is as follows: - 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. Both countries maintain an open trade policy for cars and oil. **Key Discussion Points:** 1. **Calculate the Opportunity Costs for Oil and Cars for Both Countries:** - For the US: - Opportunity cost of 1 car = 15,000 barrels of oil / 20,000 cars = 0.75 barrels of oil per car - Opportunity cost of 1 barrel of oil = 20,000 cars / 15,000 barrels of oil = 1.33 cars per barrel - For Mexico: - Opportunity cost of 1 car = 8,000 barrels of oil / 12,000 cars = 0.67 barrels of oil per car - Opportunity cost of 1 barrel of oil = 12,000 cars / 8,000 barrels of oil = 1.5 cars per barrel 2. **Explain Who Should Specialize in Producing Oil and Who Should Specialize in Producing Cars:** - The US has a lower opportunity cost for producing cars (0.75 vs. 1.5), so it should specialize in cars. - Mexico has a lower opportunity cost for producing oil (0.67 vs. 0.75), so it should specialize in oil. 3. **Analyze Susan’s Argument Using Absolute and Comparative Advantage:** - Susan argues that the US should produce both goods domestically because it can produce more of both. - **Absolute Advantage:** The US can produce more of both products, showing absolute advantage in both. - **Comparative Advantage:** Specialization should be based on comparative advantage, not absolute amounts. Since each country has a comparative advantage in different products, they both benefit from specializing and trading. Thus, Susan's argument is incorrect; the US and Mexico should specialize in their respective areas of comparative advantage to maximize efficiency and gains from trade.
Transcribed Image Text:**Title: Understanding Opportunity Costs and Comparative Advantage in US-Mexico Trade** The United States and Mexico both have the capability to produce oil and cars. The production capacity for each country is as follows: - 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. Both countries maintain an open trade policy for cars and oil. **Key Discussion Points:** 1. **Calculate the Opportunity Costs for Oil and Cars for Both Countries:** - For the US: - Opportunity cost of 1 car = 15,000 barrels of oil / 20,000 cars = 0.75 barrels of oil per car - Opportunity cost of 1 barrel of oil = 20,000 cars / 15,000 barrels of oil = 1.33 cars per barrel - For Mexico: - Opportunity cost of 1 car = 8,000 barrels of oil / 12,000 cars = 0.67 barrels of oil per car - Opportunity cost of 1 barrel of oil = 12,000 cars / 8,000 barrels of oil = 1.5 cars per barrel 2. **Explain Who Should Specialize in Producing Oil and Who Should Specialize in Producing Cars:** - The US has a lower opportunity cost for producing cars (0.75 vs. 1.5), so it should specialize in cars. - Mexico has a lower opportunity cost for producing oil (0.67 vs. 0.75), so it should specialize in oil. 3. **Analyze Susan’s Argument Using Absolute and Comparative Advantage:** - Susan argues that the US should produce both goods domestically because it can produce more of both. - **Absolute Advantage:** The US can produce more of both products, showing absolute advantage in both. - **Comparative Advantage:** Specialization should be based on comparative advantage, not absolute amounts. Since each country has a comparative advantage in different products, they both benefit from specializing and trading. Thus, Susan's argument is incorrect; the US and Mexico should specialize in their respective areas of comparative advantage to maximize efficiency and gains from trade.
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