In Lurnee, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice. In South Tyberg, it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Lurnee has a comparative advantage over South Tyberg in cocoa. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion stems from which of these inaccurate assumptions?
A) We have assumed constant returns to scale.
B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
C) We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.
D) We have assumed that agrarian nations do not specialize in producing particular products.
E) We have assumed diminishing returns to specialization.

Question

Quizplus · Accepted Answer

Constant returns to scale means that the output increases in the same proportion as the input. This assumption is not accurate in the real world, as there are diminishing returns to scale in most production processes.

In Lurnee, It Takes 10 Resources to Produce 1 Ton