Question

Suppose there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat. For Iowa the opportunity cost of producing 1 bushel of wheat is 3 bushels of corn. For Nebraska the opportunity cost of producing 1 bushel of corn is 3 bushels of wheat. Which crop should each state produce and why?

Answer 1

Answer:

Lowa should produce corn; Nebraska should produce Wheat

Explanation:

Two states: Iowa and Nebraska

Same two goods are produced by both of them: Corn and wheat

For lowa,

Opportunity cost of producing wheat = 3 bushels of corn

Opportunity cost of producing corn = (1 ÷ 3) bushels of wheat

For Nebraska,

Opportunity cost of producing wheat = (1 ÷ 3) bushels of corn

Opportunity cost of producing corn = 3 bushels of wheat

According to the concept of comparative advantage, a country is exporting the commodity in which it has a comparative advantage and a country has a comparative advantage in producing a commodity if the opportunity cost of producing that commodity is lower than the other country.

In our case, lowa should producing and exporting corn because the opportunity cost of producing corn is lower than the Nebraska and on the other hand, Nebraska should producing and exporting wheat because the opportunity cost of producing wheat is lower than the lowa.