Suppose that opportunity costs in India and Australia are constant. In India, maximum feasible hourly production rates are either 0.3 unit of cloth or 0.2 unit of food. In Australia, maximum feasible hourly production rates are either 0.5 unit of cloth or 0.5 unit of food. It is correct to state that
A) India has a comparative advantage in producing cloth.
B) India has a comparative advantage in producing both cloth and wheat.
C) India has no comparative advantage in producing cloth or wheat.
D) Australia has a comparative advantage in producing cloth.

Question

Quizplus · Accepted Answer

India has a lower opportunity cost of producing cloth as its maximum feasible hourly production rate of cloth is relatively higher than its maximum feasible hourly production rate of food. This means that to produce 1 unit of cloth, India has to give up only 0.2 food units, while Australia would have to give up 1 unit of food to produce 1 unit of cloth. Therefore, India has a comparative advantage in producing cloth over Australia. However, we cannot say anything about wheat as it is not mentioned in the given production possibilities.

Suppose That Opportunity Costs in India and Australia Are Constant