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Feliz [49]
3 years ago
10

Suppose workers in Freecia can produce two bushels of rice with the same amount of effort it takes them to produce one memory ch

ip. Workers in Warmia can produce five bushels of rice with the same effort it takes them to produce two memory chips. Which of the following must be true?
A) Warmia has a comparative advantage in producing memory chips.
B) Warmia has an absolute advantage in producing memorychips.
C) Freecia has a comparative advantage in producing memory chips.
D) Freecia has an absolute advantage in producing memory chips
Business
1 answer:
Reika [66]3 years ago
8 0

Answer:

Freecia has a comparative advantage in producing memory chips

Explanation:

Comparative advantage occurs when a company has an advantage over the other through the production of certain goods at a cheaper rate.

Looking at the given example , let us assume that the cost of producing a bushel of rice is $10 and memory chips is $10

Warmia produces two bushels of rice at $70 and a memory chip at $70(ratio 2:1) 1/3*70= 23.3

Freecia produces five bushels of rice at $70 and two memory chips at $7

(Ratio 5:2). 2/7*70=14

We can see that the cost of producing memory chips is cheaper fo Freecia

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The before-tax IRR is 37.93%

The after-tax IRR is 19.32%

The internal rate of return (IRR) is defined as the return rate on a project investment project over a periodic lifespan.

It is also referred to as the net present value of an investment project which is zero. It can be expressed by using the formula:

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<h3>(a)</h3>

For the before-tax IRR:

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Cash Inflow for the first three years = $60000

Cash inflow for the fourth year = $60000 + $20000 = $80000

∴

Using the above formula, we have:

\mathbf{0 = \dfrac{60000}{(1+r)^1}+ \dfrac{60000}{(1+r)^2}+ \dfrac{60000}{(1+r)^3}+ \dfrac{80000}{(1+r)^4}}

By solving the above equation:

r = 37.93%

<h3>(b) </h3>

For the after-tax IRR:

The cash outflow = $120000

Recall that:

  • Cash Inflow = Cash inflow × Tax rate

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For the first three years; the cash inflow is:

\mathbf{=60000 -(60000\times 0.3)  } \\ \\ \mathbf{ = 60000 -18000}  \\ \\ \mathbf{ = 42000}

For the fourth year, the cash inflow is

\mathbf{=80000 -(60000\times 0.3)  } \\ \\ \mathbf{ = 80000 -18000}  \\ \\ \mathbf{ = 62000}

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\mathbf{0 = \dfrac{42000}{(1+r)^1}+ \dfrac{42000}{(1+r)^2}+ \dfrac{42000}{(1+r)^3}+ \dfrac{62000}{(1+r)^4}}

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Learn more about the internal rate of return (IRR) here:

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