Question

QUESTION 31

1. 	Maximum Quantity
   	Only produce coffee (tons)	Only produce Computers
   Columbia	600	150
   The U.S.	800	2,400

   Columbia and the United States both produce coffee and computers. Assuming that both countries have the same amount of resources. The following table illustrates the maximum quantities of coffee and computers each can produce without trade and if they only produce one of the goods. Use information in Table above to answer the following questions.

   1. Which country has an absolute advantage in the production of coffee? Briefly explain.
   2. Which country has a comparative advantage in the production of coffee? Which country has a comparative advantage in the production of computer? Please briefly explain and show your work for your reasoning.
   3. If each country specializes in the production that it has a comparative advantage in, will they trade with one another at the price of 2 tons of coffee for 1 computer? If your answer is "NO", please explain your reasoning. If your answer is YES, who benefits more from this terms of trade, please briefly explain.

Answer 1

1)The U.S. has an absolute advantage in the production of coffee because the US is able to produce more coffee as compared to Columbia using same resources.

2) Columbia:

600 tons of Coffee = 150 Computers

1 ton of coffee = 150/600 = 0.25 Computers

So, Opportunity cost of producing 1 ton of coffee by Columbia is 0.25 computers.

The U.S.:

800 tons of Coffee = 2400 Computers

1 ton of coffee = 2400/800 = 3 Computers

So, Opportunity cost of producing 1 ton of coffee by the U.S. is 3 computers.

Columbia has comparative advantage in the production of coffee because it has lower opportunity cost in producing it.

3) Columbia:

600 tons of Coffee = 150 Computers

1 Computer = 600/150 = 4 tons of coffee

So, Opportunity cost of producing 1 computer is 4 tons of coffee.

The U.S.:

800 tons of Coffee = 2400 Computers

1 Computer = 800/2400 = 0.33 tons of coffee

So, Opportunity cost of producing 1 computer is 0.33 tons of coffee.

The U.S. has comparative advantage in the production of computer because it has lower opportunity cost in producing it.

4) If country produce only that good in which it is specialized then Columbia will produce only coffee while the U.S produce only computers.

Total production of coffee = 600

Total production of computers = 2400

NO, they will not trade.