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Chapter 16: Problem 1

Suppose that the costs of production of winter hats and wheat in two countries are as follows: $$\begin{array}{lcc} & \text{United States} & \text{Russia} \\\\\hline \text{Per winter hat} & 10 & 5,000 \text{rubles} \\ \text{Per bushel of wheat} & 1 & 2,500 \text{rubles}\end{array}$$ a. What is the opportunity cost of producing one more winter hat in the United States? In Russia? b. What is the opportunity cost of producing one more bushel of wheat in the United States? In Russia? c. Which country has a comparative advantage in winter hats? In wheat?

Short Answer

Expert verified
a. Opportunity cost of producing a winter hat: \(10 bushels of wheat in US, 2 bushels of wheat in Russia\). \nb. Opportunity cost of producing a bushel of wheat: \(0.1 hat in US, 0.5 hat in Russia\). \nc. Comparative advantage: United States in winter hats, Russia in wheat.

Step by step solution

01

Calculate Opportunity Costs

The opportunity cost of producing one more winter hat in each country is equal to the lost potential to produce a certain amount of wheat. In the United States, the cost of producing a winter hat can instead be used to produce 10 bushels of wheat (10/1). In Russia, the cost of producing a winter hat can instead be used to produce 2 bushels of wheat (5000/2500). So, the opportunity cost of producing a winter hat is \(10 bushels of wheat in US\) and \(2 bushels of wheat in Russia\). Similarly, the opportunity cost of producing one more bushel of wheat is \(0.1 hat in US\) (1/10) and \(0.5 hat in Russia\) (2500/5000).
02

Determine Comparative Advantage

The country with the lower opportunity cost for a good has a comparative advantage in producing that good. In this case, United States has a lower opportunity cost for winter hats (10 vs 2 bushels of wheat), hence a comparative advantage in producing winter hats. Russia on the other hand, has a lower opportunity cost for wheat (0.5 vs 0.1 hat), hence a comparative advantage in producing wheat.

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Most popular questions from this chapter

The following table provides hypothetical data about the supply and demand for beef in the European Union. The prices are in euros, and quantities are millions of pounds of beef per month. (You may wish to draw the supply and demand curves to help you visualize what is happening.) $$\begin{array}{ccc}\text { Price } & \text { Quantity Supplied } & \text { Quantity Demanded } \\\\\hline 0 & 0 & 160 \\\2 & 20 & 140 \\\4 & 40 & 120 \\\6 & 60 & 100 \\\8 & 80 & 80 \\\10 & 100 & 60 \\\12 & 120 & 40\end{array}$$ a. In the absence of international trade, what is the equilibrium price and quantity of beef? b. If trade opens up, and the world price of beef is (and remains) 2 euros per pound of beef, how much beef will EU producers supply? How much beef will EU consumers demand? How much beef will be imported? c. Within the EU, who gains and who loses when trade opens up?
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