Production Possibilities Schedule Country Y Country X Sugar Coffee Choice Sugar

Question

Production Possibilities Schedule Country Y Country X Sugar Coffee Choice Sugar Coffee 200 160 120 80 40 30 60 90 120 150 100 80 60 40 20 40 80 120 160 200 In the table above, assume that before specialization and trade, both countries were producing at production possibility C. Now if each country specializes according to comparative advantage, what will be the gains from trade? a. 20 units of coffee and 10 units of sugar b. 20 units of sugar and 10 units of coffee c. 20 units of sugar and 60 units of coffee d. 80 units of coffee and 90 units of sugar e. 20 units of coffee 25.

Explanation / Answer

Answer

The specialization depends on the oppotunity costs, the lower opportunity cost country specializes in the product.

the opportunity cost of A good=output of good B/Output of good A

Opportunity cost of sugar for country X is =150/200=0.75 coffee

The opportunity cost of sugar for country Y is =200/100=2 coffee

so country Y specializes in the coffee and X in sugar

the total output of sugar at point C is =120+60=180 and output of coffee=60+80=140

after specialization, both total outputs is 200 for both product

the increase in sugar is 20 units and coffee is 60 units

option C

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