Two countries produce coal and iron. Country A can produce a maximum of 500 tons of coal per day or 250 tons of iron. Country B can produce a maximum of 900 tons of coal per day or 300 tons of iron. Which statement best describes this situation?A.Country A has an absolute advantage producing iron.B.Country A has an absolute advantage producing coal.C.Country A has a comparative advantage producing iron.D.Country A has a comparative advantage producing coal
Question
Two countries produce coal and iron. Country A can produce a maximum of 500 tons of coal per day or 250 tons of iron. Country B can produce a maximum of 900 tons of coal per day or 300 tons of iron. Which statement best describes this situation?A.Country A has an absolute advantage producing iron.B.Country A has an absolute advantage producing coal.C.Country A has a comparative advantage producing iron.D.Country A has a comparative advantage producing coal
Solution
To answer this question, we first need to understand the concepts of absolute advantage and comparative advantage.
Absolute advantage refers to the ability of a country to produce more of a good or service than another country using the same amount of resources.
Comparative advantage refers to the ability of a country to produce a good or service at a lower opportunity cost than another country.
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First, let's look at absolute advantage. Country A can produce a maximum of 500 tons of coal per day or 250 tons of iron. Country B can produce a maximum of 900 tons of coal per day or 300 tons of iron. So, Country B has an absolute advantage in producing both coal and iron because it can produce more of both goods than Country A using the same amount of resources.
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Now, let's look at comparative advantage. The opportunity cost of producing one ton of coal for Country A is 2 tons of iron (500 tons of coal = 250 tons of iron, so 1 ton of coal = 0.5 tons of iron). For Country B, the opportunity cost of producing one ton of coal is 1/3 ton of iron (900 tons of coal = 300 tons of iron, so 1 ton of coal = 1/3 ton of iron). So, Country B has a lower opportunity cost in producing coal, which means it has a comparative advantage in producing coal.
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Similarly, the opportunity cost of producing one ton of iron for Country A is 2 tons of coal, while for Country B it is 3 tons of coal. So, Country A has a lower opportunity cost in producing iron, which means it has a comparative advantage in producing iron.
So, the statement that best describes this situation is: "Country A has a comparative advantage producing iron."
Similar Questions
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