Question

Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ____________ should specialize in producing fish while ___________ should specialize in producing lumber.

Answer 1

Answer:

Iceland specializes in production of fish and Canada specializes in lumber.

Explanation:

The opportunity cost of an economic decision is the cost of giving up the second-best alternative. Whoever has a relatively lower opportunity cost in the production of a product is said to be specializing in the production of that product.  

The opportunity cost for fish and lumber in Canada is 1F ≡ 1L, while it is 2F ≡ 1L for Iceland.  

This implies that Canada has a lower opportunity cost in the production of lumber as it has to give up one unit of fish while Iceland has to give up two units.  

Similarly, Iceland has a lower opportunity cost in the production of fish as it has to give up 0.5 units of lumber, while Canada has to give up one unit.