Question

Suppose the resources of Country A would allow it to produce either 150 million pounds of coffee or 100 million bushels of corn in a given period of time. Similarly the resources of Country B would allow it to produce 200 million pounds of coffee or 200 million bushels of com in the same amount of time.

a. Calculate the opportunity cost of coffee in terms of corn for each county.
b. Calculate the opportunity cost of corn in terms of coffee for each country.
c. Which country has the absolute advantage in coffee? Explain why?

Answer 1

Country A has an opportunity cost of 2/3 bushels of corn for every pound of coffee, while Country B has an opportunity cost of 1 bushel of corn for every pound of coffee. Country B has the absolute advantage in coffee production.

Step-by-step explanation:

a. The opportunity cost of coffee in terms of corn for Country A is 100 million bushels of corn divided by 150 million pounds of coffee, which equals 2/3 bushels of corn per pound of coffee. The opportunity cost of coffee in terms of corn for Country B is 200 million bushels of corn divided by 200 million pounds of coffee, which equals 1 bushel of corn per pound of coffee.

b. The opportunity cost of corn in terms of coffee for Country A is 150 million pounds of coffee divided by 100 million bushels of corn, which equals 1.5 pounds of coffee per bushel of corn. The opportunity cost of corn in terms of coffee for Country B is 200 million pounds of coffee divided by 200 million bushels of corn, which equals 1 pound of coffee per bushel of corn.

c. Country B has the absolute advantage in coffee because it can produce more coffee with its resources compared to Country A.