Question

Oscar and Julia can both produce either bananas or coffee. Oscar can produce either 16 pounds of coffee and 0 pounds of bananas or 64 pounds of bananas and 0 pounds of coffee. Julia can produce either 20 pounds of coffee and 0 pounds of bananas or 40 pounds of bananas and 0 pounds of coffee.
Which of the following statements is true?

a)The opportunity cost of 1 lb. of bananas is 4 lbs. of coffee for Oscar.

b)Oscar has absolute advantage in the production of coffee.

c)Julia has comparative advantage in the production of bananas.

d)The opportunity cost of 1 lb. of coffee is 4 lbs. of bananas for Oscar.

Answer 1

Answer:

d)The opportunity cost of 1 lb. of coffee is 4 lbs. of bananas for Oscar.

Explanation:

a)The opportunity cost of 1 lb. of bananas is 4 lbs. of coffee for Oscar.

In order to produce 64 pounds of banana, Oscar has to give up producing 16 pounds of coffee, his opportunity cost is:

$C= \frac{16}{64}= 0.25$

The statement is false.

b)Oscar has absolute advantage in the production of coffee.

Julia has a higher production capacity for coffee (20 pounds to 16 pounds) and therefore has the absolute advantage.

The statement is false.

c)Julia has comparative advantage in the production of bananas.

Julia has a higher opportunity cost for producing a pound of bananas (0.5 pounds of coffee to 0.25 pounds of coffee) and therefore does not have the comparative advantage.

The statement is false.

d)The opportunity cost of 1 lb. of coffee is 4 lbs. of bananas for Oscar.

In order to produce 16 pounds of coffee, Oscar has to give up producing 64 pounds of banana, his opportunity cost is:

$C= \frac{64}{16}= 4$

The statement is true.