Question

Suppose that a worker in agland can produce either 10 units of organic grain or 2 units of incense per year, and a worker in zenland can produce either 5 units of organic grain or 15 units of incense per year. there are 20 workers in agland and 10 workers in zenland. currently the two countries do not trade. agland produces and consumes 100 units of grain and 20 units of incense per year. zenland produces and consumes 50 units of grain and no incense per year. if each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by

Answer 1

Answer: d). 50 units of grain and 130 units of incense.

Explanation: Comparative advantage for a country exists when it has a lower opportunity cost of producing a good as compared to the other country.

As given in the problem, a worker in agland can produce either 10 units of organic grain or 2 units of incense per year, and a worker in zenland can produce either 5 units of organic grain or 15 units of incense per year.

This, means that opportunity cost of producing organic grain in Agland is 0.2 i.e (2/10) and that in Zenland is 3 i.e (15/5). Thus, clearly Agland has a lower opportunity cost in production of organic grain. Thus, it will specialise in organic grain production , producing a total of 200 units of organic grain i.e (10*20 workers).

Similarly, Zenland has a lower opportunity cost in incense production which is 0.33 i.e(5/15) in comparison to 5 i.e(10/2) of Agland. So, Zenland will produce only Incense making a total of 150 units of incense (15* 10 workers).

Thus, before trade total organic grain produces was

$100+50 = 150 units$

Before trade incese produced was,

$20+0=20 units$

While, after trade the two countries produce a total of 200 units of organic grain and 150 units of incense.

Thus, increase in organic grain production is $200 - 150 = 50 units$ and of incense is $150-20 = 130 units$

Thus, the correct answer is 50 units of grain and 130 units of incense.