Economics Semester Exam

Question

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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?(1 point)
Responses

Country B has the absolute advantage in watch production, but Country A has the comparative advantage in watch production.
Country B has the absolute advantage in watch production, but Country A has the comparative advantage in watch production.

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

Country B has the absolute advantage and the comparative advantage in watch production.
Country B has the absolute advantage and the comparative advantage in watch production.

Country A has the absolute advantage in watch production, but Country B has the comparative advantage in watch production.

Answer 1

To analyze the situation, we first need to define absolute and comparative advantage:

• Absolute Advantage: A country has an absolute advantage in the production of a good if it can produce more of that good using the same resources as another country.
• Comparative Advantage: A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost than another country.

Let's break down the production possibilities for each country:

• Country A can produce:
  • 500 watches (if all resources are used for watches)
  • 200 televisions (if all resources are used for televisions)

The opportunity cost of producing 1 watch in Country A is:

• \(200 \text{ TVs} / 500 \text{ watches} = 0.4 \text{ TVs per watch}\)

The opportunity cost of producing 1 television in Country A is:

• \(500 \text{ watches} / 200 \text{ TVs} = 2.5 \text{ watches per TV}\)

• Country B can produce:

  • 200 watches (if all resources are used for watches)
  • 100 televisions (if all resources are used for televisions)

The opportunity cost of producing 1 watch in Country B is:

• \(100 \text{ TVs} / 200 \text{ watches} = 0.5 \text{ TVs per watch}\)

The opportunity cost of producing 1 television in Country B is:

• \(200 \text{ watches} / 100 \text{ TVs} = 2 \text{ watches per TV}\)

Now, let's compare the two countries:

• Absolute Advantage: Country A produces more watches (500 vs 200) and more televisions (200 vs 100). Therefore, Country A has the absolute advantage in both watches and televisions.

• Comparative Advantage:

  • For watches:

    • Country A's opportunity cost is 0.4 TVs per watch.
    • Country B's opportunity cost is 0.5 TVs per watch. Country A has the lower opportunity cost for watches, so it has the comparative advantage in watch production.

  • For televisions:

    • Country A's opportunity cost is 2.5 watches per TV.
    • Country B's opportunity cost is 2 watches per TV. Country B has the lower opportunity cost for televisions, so it has the comparative advantage in television production.

Given this analysis, we can conclude:

• Country A has the absolute advantage and the comparative advantage in watch production.
• Country B has the comparative advantage in television production.

So, the correct response is:

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