Question

In Zombia, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice. In South Curmudgea, it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Zombia has a comparative advantage over South Curmedgea in cocoa. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it. Which of the following is an inaccurate assumption on which this conclusion is based?

a.We have assumed that agrarian nations do not specialize in fertilizers.
b.We have assumed constant returns to scale.
c.We have assumed the prices of resources and exchange rates in the two countries are dynamic.
d.We have assumed diminishing returns to specialization.
e.We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.

Answer 1

Option B. We have assumed constant returns to scale.

Step-by-step explanation:

Constant returns to scale occur when increasing the number of inputs leads to a proportional increase in the level of output. In other words constant returns to scale is when an increase in inputs cause an equivalent increase in output.

Therefore in the scenario above, we have inaccurately assumed constant returns to scale, the is because as more inputs are added, it will get to a point where there will be less than proportionate increase, which means the extra resources added will not produce an equivalent level of output. This is the point of diminishing returns.

When this point is reached and a decrease in production is being experienced, free trade between both nations will not be as smooth as before, and each nation will start to reserve more of its products.