Question

Suppose the following table displays the production levels of capital goods and consumption goods of the towns of Broseley and Ironbridge.
Ironbridge Capital Goods Consumption Goods Broseley
32 40 40 80


Using the table, select one or more phrases to complete the statement.

Ironbridge has___________

a.an absolute advantage in capital goods.
b. an absolute advantage in consumption goods.
c. a comparative advantage in consumption goods.
d. a comparative advantage in capital goods.

Answer 1

Answer:

d. a comparative advantage in capital goods.

Explanation:

I'm not sure how these numbers should go, but I think it should be:

                            Capital Goods         Consumption Goods

Ironbridge                     32                                40

Broseley                        40                                80

Ironbridge's opportunity cost to produce 1 capital good = 40 / 32 = 1.25 consumption goods

Ironbridge's opportunity cost to produce 1 consumption good = 32 / 40 = 0.8 capital goods

Broseley's opportunity cost to produce 1 capital good = 80 / 40 = 2 consumption goods

Broseley's opportunity cost to produce 1 consumption good = 40 / 80 = 0.5 capital goods

Ironbridge has a comparative advantage int he production of capital goods (lower opportunity cost) while Broseley has a comparative advantage in the production of consumption goods.

Opportunity costs refers tot he extra costs or benefits lost resulting from choosing one activity or investment over another alternative. In this case,, if Ironbridge wants to produce 1 capital good, it will have to forego 1.25 consumption goods.