Question

Suppose that companies in the United States can produce a car with 200 labor hours and a ton of rice with 20 labor hours. In China it takes 250 labor hours to make a car and 50 labor hours to grow a ton of rice.

Required:
a. What is the opportunity cost of producing rice in each country, stated in terms of cars?
b. What is the opportunity cost of cars, stated in terms of rice?
c. Which country has a comparative advantage in cars?
d. Which country has a comparative advantage in rice?

Answer 1

a. What is the opportunity cost of producing rice in each country, stated in terms of cars?

In the U.S., the opportunity cost of producing a ton of rice is a 10th of a car, since producing a ton of rice requires 20 labor hours, and producing a whole car take 200 labor hours.

In China, a ton of rice has an opportunity cost a 5th of car.

b. What is the opportunity cost of cars, stated in terms of rice?

In the U.S., the opportunity cost is 10 tons of rice, and China is 5 tons of rice.

c. Which country has a comparative advantage in cars?

The U.S. has the comparative advantage because its opportunity cost in terms of tons of rice is lower than that of China.

d. Which country has a comparative advantage in rice?

China, because its opportunity cost in terms of cars is lower than that of the U.S.