Question

There are two countries (Country A and Country B) that produce bluray disks and bags of microwave popcorn. Country A can produce either 100,000 bluray disks and 0 bags of popcorn per month, or 0 bluray disks and 200,000 bags of popcorn per month. Country B can produce either 80,000 bluray disks and 0 bags of popcorn per month, or 0 bluray disks and 80,000 bags of popcorn per month.

Sketch two graphs representing the production possibility frontiers of the respective countries. Plot bluray disks per month on the y axis, and bags of popcorn per month on the x axis

F.

   Should Country A and B specialize in their production of goods? How should they specialize and why?

Answer 1

Country A:

100000 bluray disks = 200000 bags of popcorn

1 bluray disk = 200,000/100,000 = 2 bags of popcorn

Opportunity cost of 1 bluray disk is 2 bags of popcorn.

Country B:

80000 bluray disks = 80000 bags of popcorn

1 bluray disk = 80000/80000 = 1 bag of popcorn

Opportunity cost of 1 bluray disk is 1 bags of popcorn.

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Country B has comparative advantage in the production of bluray disk and Country A has a comparative advantage in bags of popcorn.

Specialization will occur if Country B will produce only bluray disk while Country A will produce only bags of popcorn.