Question

Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. If the two countries do not trade, Cornland will produce and consume 400 bushels of corn and 100 bushels of oats, while Oatland will produce and consume 60 bushels of corn and 400 bushels of oats. If each country made the decision to specialize in producing the good in which it has a comparative advantage, then the combined yearly output of the two countries would increase by
a. 280 bushels of corn and 450 bushels of oats.
b. 360 bushels of corn and 520 bushels of oats.
c. 360 bushels of corn and 640 bushels of oats.
d. 340 bushels of corn and 500 bushels of oats.

Answer 1

Answer: d. 340 bushels of corn and 500 bushels of oats.

Explanation:

The country that has the lower opportunity cost in producing a certain commodity is the one with competitive advantage.

Cornland

Opportunity cost of growing Corn =  10/40 = 1/4 bushels of oats

Opportunity cost of growing oats = 40 / 10 = 4 bushels of corn

Oatland

Opportunity cost of growing Corn =  50/5 = 10 bushels of oats

Opportunity cost of growing oats = 5/50 = 1/10 bushels of corn

Cornland therefore has competitive advantage in producing corn and Oatland has competitive advantage in oats.

If both countries traded, Cornland would focus on corn and Oatland would focus on oats.

If all of Cornland's workers focused on corn, production would be:

= 20 * 40 bushels per worker

= 800 bushels of corn

If all of Oatland workers focused on oats, production would be:

= 20 * 50

= 1,000 bushels of oats

Increase in corn would be:

= 800 - (400 bushels from Cornland + 60 bushels from Oatland)

= 340 bushels of corn

Increase in oats:

= 1,000 - (100 bushels from Cornland + 400 bushels from Oatland)

= 500 bushels of oats