Question

If Country A uses all of the resources at its disposal, it can produce a maximum of 500 watches or 200 televisions. Within the same time frame, if Country B uses all of its resources, it can produce a maximum of 200 watches or 100 televisions. Which of the following must be true?
A Country A has the absolute advantage in watch production, but Country B has the comparative advantage in watch production.
B. Country B has the absolute advantage and the comparative advantage in watch production.
C. Country A has the absolute advantage and the comparative advantage in watch production.
D. Country B has the absolute advantage in watch production, but Country A has the comparative advantage in watch production

Answer 1

C. Country A has the absolute advantage and the comparative advantage in watch production.

Reason: Absolute advantage — A can produce 500 watches vs B's 200, so A has the absolute advantage. Comparative advantage — A's opportunity cost of 1 watch = 200 TVs / 500 watches = 0.4 TVs; B's = 100/200 = 0.5 TVs. A has the lower opportunity cost, so A also has the comparative advantage in watches.