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? 🙁
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…
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
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