Question

Given your answers to questions 1 and 2, which firm has the comparative advantage in producing locks?

Q1. A firm can either produce 15 locks or 100 keys. What is the opportunity cost of making 2 locks?

Q2. A firm can either produce 12 locks or 144 keys. What is the opportunity cost of making 4 locks?

Answer 1

The opportunity costs can be defined as the lost units of output of other goods for producing an additional unit of output of a good.

A country has comparative advantage in the production of that good in which it has lower opportunity cost.

Firm 1

A firm can either produce 15 locks or 100 keys

.

Hence opportunity cost of making 15 locks are= 100 keys

opportunity cost of making 1 locks are= 100/15 keys

opportunity cost of making 2 locks are= (100/15)*2 keys

=13.33 keys

Firm 2

Since a firm can can either produce 12 locks or 144 keys.

Hence opportunity cost of making 12 locks are= 144 keys

opportunity cost of making 1 locks are= 144/12 keys

opportunity cost of making 4 locks are= 12*4 keys

=48 keys

Since the opportunity cost of firm 1 is lower compare to firm 2, in making locks.

Hence firm 1 has comparative advantage in the production of locks.