Question

A 4-column table has 2 rows. The first column is labeled country with entries Country A, Country B. The second column is labeled Cost (units) with entries 1, 1. The third column is labeled Petroleum (units) with entries 16 (0.5 O C), 8 (1 O C). The fourth column is labeled Seafood (units) with entries 8 (2 O C), 8 (1 O C).
How can the law of comparative advantage be applied to Country A and Country B?

Both countries should produce petroleum and seafood.
Both countries should produce petroleum.
Country A should produce seafood, and Country B should produce petroleum.
Country A should produce petroleum, and Country B should produce seafood.

Answer 1

Country A should produce petroleum, and Country B should produce seafood.

Reason: With one unit of cost A can make 16 petroleum or 8 seafood, so A's opportunity cost of 1 petroleum = 0.5 seafood (and of 1 seafood = 2 petroleum). Country B can make 8 petroleum or 8 seafood, so B's opportunity cost of 1 petroleum = 1 seafood (and of 1 seafood = 1 petroleum). Because A has the lower opportunity cost of petroleum and B the lower opportunity cost of seafood, A has comparative advantage in petroleum and B in seafood.