Question

Which of the following is not correct? a. The producer who requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. b. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X. c. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good. d. The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

Answer 1

Answer:

b. The producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X

Explanation:

The opportunity cost is the cost of the best alternative.

In this case, the producer uses factors (labor, raw materials, capital) to produce good X. His opportunity cost is the goods he would produce instead of good X.

A producer who gives up less of the other goods means his best alternative is lower than one who gives up more.

For example

if a producer can do

10 good X

or 50 of good Y

The opportunity cost for good X is 5 units of Y

if another producer can do

10 good X

or 20 of good Y

The opportunity cost of good X is 2 units of Y

For this second producer, it is more feasible to produce X than the first producer. It renounces to fewer unis of good Y