Suppose that a worker in Country A can make either 10 iPhones or 5 iPads each year. Country A has 100 workers. Suppose a worker in Country B can make either 2 iPhones or 10 iPads each year. Country B has 200 workers. Which of the following is true?
A) Country B should produce iPads and Country A should produce iPhones, and they could both benefit from trade.
B) Country B should produce iPhones and Country A should produce iPads, and they could both benefit from trade.
C) Neither country would benefit from trade because there is no comparative advantage at producing these goods.
D) Because Country B has an absolute advantage at producing iPads, it should specialize in their production.

Question

Quizplus · Accepted Answer

To determine which country should produce which goods, we need to compare their opportunity costs (i.e. the cost of producing one good in terms of how much of the other good could have been produced instead).

For Country A, the opportunity cost of producing one iPhone is 2 iPads (since they could have made 5 iPads instead). For Country B, the opportunity cost of producing one iPhone is 5 iPads (since they could have made 10 iPads instead).

This means that Country A has a comparative advantage in producing iPhones (since their opportunity cost of producing an iPhone is lower than Country B's opportunity cost) and Country B has a comparative advantage in producing iPads (since their opportunity cost of producing an iPad is lower than Country A's opportunity cost).

Therefore, according to the principle of comparative advantage, Country A should specialize in producing iPhones and Country B should specialize in producing iPads. They can then engage in trade, with Country A exporting iPhones to Country B in exchange for iPads. Both countries can benefit from trade by obtaining more goods than they could have produced on their own.

Suppose That a Worker in Country a Can Make Either