CFA CFA Level 1 Help with problem

Help with problem

  • Author
    Posts
    • PortfolioManager
      Participant
      Up
      0
      Down

      The following chart indicates the production possibilities of food and drink per day in Country A and Country B.

      Units of Output Per Day
      Country A Country B
      Food 9 5
      Drink 7 5
      Which of the following statements is most accurate?

      A) Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production.
      B) Since B workers can produce more of food and drink than A workers, no gains from trade are possible.
      C) Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production.

      I chose B because the opportunity cost of Country A producing drinks is 0.778, but Schweser says it’s Answer A. Can anyone help me pls? 🙁

    • nar_bsoa
      Participant
      Up
      1
      Down

      I’m getting the answer as C. Am i missing something here

      Country A – Food – 9/7 drink
      Country A – Drink – 7/9 food
      Country B – Food – 1 drink
      Country B – Drink – 1 food

      So, country A has a comparative advantage in food (9/7 drink vs. 1 drink in country B) whereas country B has comparative advantage in drink ( 1 vs 7/9). So mutual gains will result is A produces more of food and B produces more of drink

      Any help is much appreciated…

    • nar_bsoa
      Participant
      Up
      2
      Down

      oops…i had messed it up!!!

      Country A has comparative advantage in drink (it forgoes 7/9 food for producing 1 drink whereas country B forgoes 1 food for a drink. Hence country A is more efficient in producing drink). Similarly country B has comparative advantage in drink.

      So the right answer is A.

      @ portfolio manager – Sorry for the confusion. Hope this clarifies

    • PortfolioManager
      Participant
      Up
      0
      Down

      Ok i got it! Thanks a lot nar_bsoa. I was calculating it wrongly based on the schweser example which involves labor costs, not production possibilties. Thanks for the great help!

Viewing 3 reply threads
  • You must be logged in to reply to this topic.