Chapter 4, Problem 2FRQ

a)

To determine

The question requires us to determine the opportunity cost of producing wheat for each country.

Explanation of Solution

The opportunity cost is the best next alternative for choosing a decision. If a firm is producing only two goods, then producing one good is possible when the firm has foregone the production of other goods.

The opportunity costs of producing a bushel of wheat in country A

  $\begin{array}{l}=\frac{60}{15}\\ =4\text{units of textiles}\end{array}$

The opportunity costs of producing a bushel of wheat in country B

  $\begin{array}{l}=\frac{60}{10}\\ =6\text{units of textiles}\end{array}$

b)

To determine

The question requires us to determine the country which has an absolute advantage in wheat production.

Explanation of Solution

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

Since the production of wheat in country A is more than in country B. So, country A has an absolute advantage in producing wheat.

c)

To determine

The question requires us to determine the country which has a comparative advantage in textile production.

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 costs of producing a unit of textile in country A

  $\begin{array}{l}=\frac{15}{60}\\ =0.25\text{bushels of wheat}\end{array}$

The opportunity costs of producing a unit of textile in country B

  $\begin{array}{l}=\frac{10}{60}\\ =0.166\text{bushels of wheat}\end{array}$

Since the opportunity cost of producing textiles is lower in country B, thus, country B has a comparative advantage in textile production.