Question

Iceland can produce 32 units of food per person per year or 8 units of clothing per person per year, but Lavaland can produce 16 units of food per year or 8 units of clothing. Which of the following is true?

A. Lavaland has both a comparative and absolute advantage in producing food.

B. Iceland has a comparative advantage but not an absolute advantage in producing food.

C. Iceland has both a comparative and absolute advantage in producing food.

D. Lavaland has both a comparative and absolute advantage in producing cloth.

Answer 1

Answer
Iceland has the absolute advantage in food and there is no such absolute advantage in cloths because both produce same
the comparative advantage depends on the opportunity cost
the opportunity cost of a good=production of the other good/production of the good
the opportunity cost of food for Iceland=8/32=1/4=0.25 cloths
the opportunity cost of food for Lavaland=8/16=1/2=0.50 cloths
so Iceland has the comparative advantage in food and Lavaland have the comparative advantage in cloths.
option C