Differential Analysis for a Lease or Sell Decision Granite Construction Company is considering selling excess machinery with a b
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Answer:
Please refer explanation and attached diagram
Explanation:
A. Theory of international trade: Comparative advantage
This is referred to as an individual, company, region or country's ability to produce goods and services at a lower opportunity cost than that of its trade partners. The country with the least opportunity cost has comparative advantage in that product. This is different to absolute advantage which only takes into account the ability of a country to produce a greater number of output using the same resources.
B. In order to identify which country will produce what product, the opportunity cost for each product must be found. In other words, the benefit lost from the second best alternative.
In Country A, to produce 6 automobiles, 12 movies must be sacrificed. Hence, to produce 1 automobile, 2 movies are sacrificed (12/6). On the other hand, to produce 1 movie, 0.5 of an automobile is sacrificed (6/12).
When looking at Country B, it can produce either 5 automobiles or 8 movies. Hence, when producing a single automobile, the opportunity cost it incurs is being unable to produce 1.6 movies (8/5). Similarly, to produce 1 movie, it sacrifices 0.6 of automobiles (5/8).
Hence comparatively, Country A having the lower opportunity cost in movie production, will produce movies, whilst Country B having the lower opportunity cost in producing automobiles will produce automobiles.
C. The production possibility frontier has been attached.
In order to draw the lines, at least two points are required, but the question only provides one point for each Country. However, using the opportunity cost, the other points can be derived. For example, in country A, if 2 movies are sacrificed to produce 1 automobile, then when automobile production increases from 6 to 7, movie production falls from 12 to 10.
In country B, if 0.6 automobiles are sacrificed to produce 1 movie, then when movie production rises from 8 to 9, automobile production falls from 5 to 4.4. This method can be used to find other points and draw the PPF as has been done :)
