Question

Qu. 2* Consider Australia and South Korea who can both produce steel and mobile phones. In a year, Australia can produce 24 billion tonnes of steel or it can produce 12 million mobile phones. In a year, South Korea can produce 30 billion tonnes of steel or it can produce 20 million mobile phones.

a. Explain which country has the absolute advantage in steel production and which country has the absolute advantage in mobile phone production?

b. What is Australia’s opportunity cost of producing 1 billion tonnes of steel? What is South Korea’s opportunity cost of producing 1 billion tonnes of steel? Explain which country has the comparative advantage in steel production?

c. Explain which country should specialise in steel production and which country should specialise in mobile phone production?

d. What is the maximum (in terms of tonnes of steel) that Australia would be willing to pay for South Korea’s mobile phones? What is the minimum (in terms of tonnes of steel) South Korea would accept for its mobile phones? Will they trade and if so, which country benefits from the trade?

Answer 1

Q1) table

	Steel S	mobile M
Aus	24	12
SK	30	20

A) as South Korea has higher Productivity in both goods,

So south Korea has Absolute ADVANTAGE in Both steel & mobile

b) for Aus

Opportunity Cost of 1 steel = 12/24 = .5 M

For SK, OC of 1 steel = 20/30= 2/3 M

So as Aus has lower opportunity cost of production of Steel, so Aus has Comparative ADVANTAGE in Steel

& South Korea has Comparative ADVANTAGE in Mobile

c) Australia should specialize in Steel

& South Korea should specialize in Mobile

d) ​​​​​​ Maximum WTP for 1 M = 2 units of steel

For South Korea, Minimum willingness to accept for 1 M = 1.5 Steel units

Yes, both will trade, bcoz Minimum willingness to accept < Maximum WTP

Both nations will benefit from trade

Bcoz both could Consume at a point , which lies outside their PPF , consumption possibilities expand