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 has the comparative advantage in petroleum; Country B has the comparative advantage in seafood.

Reason: With one unit of input Country A can make 16 petroleum or 8 seafood, so the opportunity cost of 1 unit of petroleum in A is 0.5 seafood (and the cost of 1 seafood is 2 petroleum). In Country B one unit makes 8 petroleum or 8 seafood, so the opportunity cost of 1 petroleum is 1 seafood (and 1 seafood costs 1 petroleum). Because A’s opportunity cost of petroleum (0.5 S) is lower than B’s (1 S), A should specialize in petroleum. Because B’s opportunity cost of seafood (1 P) is lower than A’s (2 P), B should specialize in seafood.