Question

Which of the following events would confirm the Theory of Comparative Advantage?

a. A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.
b. A U.S. firm manufacturing computers establishes a plant in Germany in order to reduce transportation costs and to retain its advantage over its German competitors.
c. A U.S. firm manufacturing computers imports the needed components from Taiwan.
d. All of these choices are correct.
e. None of these choices are correct.

Answer 1

The event that would confirm the Theory of Comparative Advantage is when a U.S. firm establishes a plant in Germany to reduce transportation costs and retain its advantage over German competitors. Correct option is b)

Step-by-step explanation:

The event that would confirm the Theory of Comparative Advantage is option b. When a U.S. firm establishes a plant in Germany to reduce transportation costs and retain its advantage over German competitors, it demonstrates the principle of comparative advantage. Comparative advantage is based on the idea that countries should specialize in producing goods or services in which they have a lower opportunity cost compared to other countries.