Ap economics: Comparative Advantage Review frqs April 2016 Comparative Advantage frqs



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AP Economics:
Comparative Advantage Review FRQs April 2016
Comparative Advantage FRQs

OUTPUT PER WORKER PER DAY

Units of opp Units of opp

Country Cloth costs Food costs

Newland 10 .1 1 10

Beeland 10 .5 5 2


  1. The table above gives the production alternatives of two nations that are producing cloth and food, using equal amounts of resources.

a) i) Calculate the opportunity cost of producing a unit of cloth in Newland



1/10 unit of food

ii) Calculate the opportunity cost of producing a unit of food in Beeland.



2 units of cloth

b) i) Which nation has the comparative advantage in cloth production?



Newland

ii) Which nation has the comparative advantage in food production?



Beeland

c) Now assume that the productivity of Beeland’s workers triples for each good.

i) Which country has the comparative advantage in food production?

Beeland

ii) Explain how you determined your answer.



Opportunity cost of producing food has not changed… or… Beeland’s opportunity cost of producing food is 2 units of cloth and Newland’s is 10 units of cloth. Beeland has a lower opportunity cost of producing food and thus a comparative advantage in food production.

2)



Using equal amounts of resources, the countries of Ashna and Luna can each produce

any combination of food and machines described by their production possibilities

curves above. (Useful to set up cost and opportunity cost tables)


  1. Which country has an absolute advantage in the production of machines? Explain.

Luna. They produce more machines with same amount of resources (40 vs. 10).


  1. Which country has an absolute advantage in the production of food? Explain.

Luna. They produce more food with same amount of resources (40 vs. 30)


  1. Which country has a comparative advantage in the production of machines? Explain.

Luna. They have lower opportunity cost of producing machines (1 unit of food vs 3 units of food).


  1. With trade between these two countries, which country will export food? Explain.

Ashna. They have the lower opportunity cost in producing food (1 machine vs 1/3 machine) and thus the comparative advantage in producing food, so they should specialize in producing food and Luna should produce machines and import food.


  1. Give an example of terms of trade acceptable to both countries.

Luna would pay between 1/3 and 1 machine per food and Ashna would

pay between 1 and 3 units of food per machine.

(Any figure between pre-trade opportunity costs is acceptable)

3)



Assume that two countries, Atlantis and Xanadu, have equal amounts of resources.

Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line

MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any

combination, as shown by the line PQ in the figure above.




  1. Which country has an absolute advantage in the production of tractors? Explain how you determined your answer.

Xanadu. They can produce more tractors with the same resources (40 vs. 10)


  1. Which country has a comparative advantage in the production of cars? Using the concept of opportunity cost, explain how you determined your answer.

Atlantis. Their opportunity cost of producing a car is 1/3 tractor, Xanadu’s is 2 tractors.

  1. If the two countries specialize and trade with each other, which country will import cars? Explain why?

Xanadu. They have higher opportunity cost of producing carsso should specialize in producing tractors… or …Atlantis has lower opportunity cost of producing cars and should specialize in producing cars… or … it is cheaper for Xanadu to produce tractors and trade for cars than to produce cars.

  1. If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade.

Atlantis can produce 1 car and trade for 1 tractor. Without trade they would give up production of 3 cars to produce 1 tractor. Trade allows Atlantis to consume beyond their PPC.


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