Scenario: Hawaii and South Carolina are trading partners. Hawaii has an absolute advantage in the production of both coffee and tea. The opportunity cost of producing 1 pound of tea in Hawaii is 2 pounds of coffee, and the opportunity cost of producing 1 pound of tea in South Carolina is 1/3 pound of coffee.
-Refer to the scenario above.Which of the following statements is true?

Question

Quizplus · Accepted Answer

Hawaii has a lower opportunity cost for producing coffee (1 pound of tea costs 2 pounds of coffee, meaning it can produce coffee more efficiently), while South Carolina has a lower opportunity cost for producing tea (1 pound of tea costs only 1/3 pound of coffee, meaning it can produce tea more efficiently). Therefore, according to the principle of comparative advantage, Hawaii should specialize in coffee and South Carolina in tea.

Scenario: Hawaii and South Carolina Are Trading Partners