Question

Suppose the United States can produce 10,000 books or 500 donuts while France can produce

12,000 books and 600 donuts.

a) Which country has absolute advantage in donuts? In books?

b) Which country should specialize in donuts? In books? Show your work

Answer 1

Answer
a)
the absolute advantage depends on the higher production and France can produce more than the US so France have an absolute advantage in the books.
b)
the specialization depends on the lower opportunity cost, a country specialize if it has the lower opportunity cost of the production
Opportunity cost of a good=production of the other good/production of the good
The opportunity cost of Books for US=500/10000=0.05
The opportunity cost of Books for France=600/12000=0.05
They both have same opportunity cost so there will be no gain from the trade so both will produce both the goods.