Chapter 4, Problem 1FRQ

a)

To determine

The question requires us to determine the opportunity cost of corn production in each country.

Explanation of Solution

The following graph represents the production of corn and computers in country A and country B:

Country	Corn (bushels)	Computers
Country A	800	200
Country B	400	500

From the given table:

The opportunity cost of a bushel of corn in country A

  $\begin{array}{l}=\frac{200}{800}\\ =0.25\text{unit of computer}\end{array}$

The opportunity cost of a bushel of corn in country B

  $\begin{array}{l}=\frac{400}{500}\\ =0.8\text{unit of computer}\end{array}$

b)

To determine

The question requires us to determine the country which has an absolute advantage in producing a computer.

Explanation of Solution

The country with high production of a product in absolute terms will have an absolute advantage in producing that product.

The number of computers (500 units) country B is producing is more than the number of computers (200 units) country A is producing in absolute terms.

So, country B has an absolute advantage in producing computers.

c)

To determine

The question requires us to determine the country which has a comparative advantage in producing corn.

Explanation of Solution

The country with a lower opportunity cost of producing a product will have a comparative advantage in producing that product. A lower opportunity cost indicates a less quantity of foregone goods a country has to sacrifice to produce a particular product.

A nation having a comparative advantage explains its ability to produce more specific goods and services by using the given resources.

The opportunity cost of corn production is lower in country A. Thus, country A has a comparative advantage in corn production.

d)

To determine

The question requires us to determine the goods imported by country B when each country specializes.

Explanation of Solution

The country with a lower opportunity cost of producing a product will have a comparative advantage in producing that product. A nation has a comparative advantage will have specialization in the production of that particular good.

The opportunity cost of a computer in country A

  $\begin{array}{l}=\frac{800}{200}\\ =4\text{bushels of corn}\end{array}$

The opportunity cost of a computer in country B

  $\begin{array}{l}=\frac{500}{400}\\ =1.25\text{bushels of corn}\end{array}$

The opportunity cost of computer production is lower in country B. Thus, country B has a comparative advantage in computer production.

So, country A gets specialization in corn production while country B gets specialization in computer production.

Therefore, country B will produce computers and import corn from country A.

e)

To determine

The question requires us to determine the minimum price country A will take to export corn to country B.

Explanation of Solution

A country sets the price of exporting goods more than the opportunity cost of producing that good. The opportunity cost of a bushel of corn in country A is 0.25 computers.

The minimum price country A will charge to export corn to country B is 0.25 computers.