Question

Suppose that the USA can make 15,000,000 cars or 20,000,000 bottles of wine with one year's worth of labor. France can make 10,000,000 cars or 18,000,000 bottles of wine with one year's worth of labor. From these numbers, we can conclude:

Answer 1

Answer: The answer is as follows:

Explanation:

From these numbers, we can conclude that USA has a comparative in producing cars and France has a comparative advantage in producing bottles.

Opportunity cost shows that how many units of one good have to be foregone in order to produce one additional unit of other good.

In USA:

Opportunity cost of producing bottles = $\frac{15000000}{20000000}$

= 0.75

Opportunity cost of producing cars = $\frac{20000000}{15000000}$

= 1.33

In France:

Opportunity cost of producing bottles = $\frac{10000000}{18000000}$

= 0.55

Opportunity cost of producing cars = $\frac{18000000}{10000000}$

= 1.8

Above calculations clearly shows that USA has a lower opportunity in producing 1 unit of car as compared to the France, so it has a comparative advantage in producing cars.

Whereas, France has a lower opportunity in producing 1 unit of bottle as compared to the USA, so it has a comparative advantage in producing Bottles.