Chapter 8, Problem 1Q

To determine

The representation of the given figure about absolute and comparative advantage in either of goods.

Explanation of Solution

Budget constraint represents the choice trade-off that an economic agent has to make. It takes the opportunity cost of purchasing the chosen goods as well as the feasibility of the economic agent into account. Furthermore, compared to a worker in Taiwan (T), a worker in Korea (K) produces more of both goods A and B as the budget constraint of Korea lies to the right of Taiwan. This means that the Korean worker has an absolute advantage in the production of both goods.

Given the quantities of both the goods produced in T and K, there is a need to calculate the opportunity cost of both the goods in terms of another good.

In Taiwan, the opportunity cost of producing good A in terms of good B will be calculated as done below:

$\begin{array}{c}{\text{Opportunity Cost}}_{\text{AB}}\text{ = }\frac{15}{100}\\ =0.15\text{ units}\end{array}$

Similarly, the opportunity cost of producing good B in terms of good A will be calculated as done below:

$\begin{array}{c}{\text{Opportunity Cost}}_{\text{BA}}\text{=}\frac{100}{15}\\ =6.67\text{ units}\end{array}$

In Korea, the opportunity cost of producing good A in terms of good B will be calculated as done below:

$\begin{array}{c}{\text{Opportunity Cost}}_{\text{AB}}\text{ = }\frac{35}{150}\\ =0.23\text{ units}\end{array}$

Similarly, the opportunity cost of producing good B in terms of good A will be calculated as done below:

$\begin{array}{c}{\text{Opportunity Cost}}_{\text{BA}}\text{=}\frac{150}{35}\\ =4.28\text{units}\end{array}$

After all the calculations, it has been observed that in Taiwan, the opportunity cost of producing good A is less than the opportunity cost of producing good A in Korea. So, Taiwan has the comparative advantage in good A and Korea has the comparative advantage in good B.