Question

Both Microville and Macroville have an equal amount of resources and the same access to production technology. The chart below shows each country's production possibilities curve for producing boats and cars.

(a) Which country has the absolute advantage producing cars? Explain how you determined your answer.
(b) What is the opportunity cost if Macroville decides to use all of its resources and produce 20 boats?
(c) Which country has the comparative advantage in producing cars? Explain how you determined your answer.
(d) If each country were to specialize in producing either cars or boats and then trade for the other product, which good would each make respectively? Explain how you determined your answer.

Answer 1

(a) Microville has the absolute advantage producing cars. Because the most it can produce is 10 while Macroville can only produce 5.

(b) The opportunity cost is 5 cars if Macroville decides to use all of its resources and produce 20 boats.

(c) Microville has the comparative advantage in producing cars? Because its opportunity cost for 1 car is 1 boat while Macroville's cost for 1 car is 4 boats.

(d) If each country were to specialize in producing either cars or boats and then trade for the other product, Macroville makes 20 boats and Microville makes 10 cars. Each country produces the goods it has a comparative advantage in. Cars for Microville and boats for Macroville.

Answer 2

a) Microville has an absolute advantage in cars because it produces 10 cars, 5 more than Macroville.

b) if Macroville decides to use all of its resources and produce 20 boats, the opportunity cost is 5 cars.

c) Microville has a comparative advantage in cars because it has a lower opportunity cost than Macroville. It costs Microville only 1 boat in opportunity cost for each car and Macroville is 4 boats for each car.

d) in specializing each country produces the max no of goods with the lowest opportunity cost. so Microville makes 10 cars, Macroville makes 20 boats and then they trade with each other.