Suppose that the United States can make 15 cars or 20 bottles of wine with one year's worth of labor.France can make 10 cars or 18 bottles of wine with one year's worth of labor.From these numbers, we can conclude that
A)the United States has a comparative advantage in the production of cars.
B)France has a comparative advantage in the production of wine.
C)the United States has an absolute advantage in the production of cars.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

By comparing the production per year of each good in both countries, we can determine their absolute advantage. The US can produce more cars and wine per year than France, so it has an absolute advantage in both goods.

However, to determine comparative advantage, we need to compare the opportunity costs of producing each good. In this case, the opportunity cost of producing one car in the US is 20/15 = 4/3 bottles of wine, while in France it is 18/10 = 9/5 bottles of wine. Thus, the US has a lower opportunity cost of producing cars (in terms of wine forgone) and a higher opportunity cost of producing wine (in terms of cars forgone). Therefore, the US has a comparative advantage in cars and France has a comparative advantage in wine.

Suppose That the United States Can Make 15 Cars or 20