Assume a world with two economies, Mexico and Canada. Each country is capable of
ID: 1136837 • Letter: A
Question
Assume a world with two economies, Mexico and Canada. Each country is capable of producing two important agricultural products: peppers and potatoes. Assume each country has the following production capacities: Peppers Potatoes Mexico 500 250 Canada 250 250 The capacities indicate the total amount of each product the economy could produce (in some unspecified units) if all that country's available resources are dedicated to production of that product. Assume that within each economy resources are equally adaptable to either product (i.e., if you allocated half the resources to one product, you would get half the production). Question 1: If each country were to employ half their resources on peppers and half orn potatoes, how much of each product would each country produce, and how much of cach product would be produced in total (i.e., combining both countries)? Mexico Canada Total Peppers Potatoes Question 2A: What if we tried to take advantage of the Law of Comparative Advantage and had countries specialize? Which country should specialize in potatoes? Explain why, you can be brief, but be precise (be careful to focus on opportunity cost). Question 2B: Assuming we specialize, with all resources employed in each economy on the product where it has a comparative advantage, how much of each product would be produced in each country, and in total? Mexico Canada Total Peppers PotatoesExplanation / Answer
1. As given if half resources are allocated to each product then half of total output will be produced of each good.
Thus if Mexico is using all resources then it is producing 500 units of peppers. And if half resource get allocated to each good then it will produce 500/2 = 250 units of pepper and 250/2 = 125. SImilarly Canada will produce 250/2 = 125 units of both good .
Hence when half resources get employed to each product by both countries then the result will be -
Q.2. Comparative advantage occurs when one country can produce a product by giving up less units of another product as compared to other. IN other words the product which has less opportunity cost for a country than other then the former has comparative advantage in the production of that good.
IT is calculated as follows:
Mexico produces either 550 peppers or 250 potatoes. To produce one unit of pepper it has to leave 250/550 = 0.45 units of potatoes. And to produce one more unit of potatoe it has to leave 550/250 = 2.2 units of pepper.
On other hand, for canada to produce one more unit of pepper it has to leave 250/250 = 1 unit of potatoe and also to produce onemore unit of potatoes it has to leave 1 unit of pepper.
Now see that opportunity cost of producing pepper (0.45) of mexico is less than canada's (1). And opportunity cost of producing potatoe (1) of canads is less than of mexico (2.2).
Thus mexico has comparartive advantage and willl have specualization in producing pepper and canada will have comparative advanatge and specialization n producing potatoes.
Q.3 if country produces the product in which they specializes then Mexico will produce pepper and canada will produce potatoes.
Q.4 Mexico has 500 units of pepper now. If it trades with canada then will left with 500-175 = 325 units of peppers and 125 units of potatoes.
On other hand canada will have 250-125 = 125 units of potatoes and 175 units of peppers.
Q.5. Mexico had 250 units of peppers and 125 units of potatoes but now it has 325-250 = 75 more units of peppers . It is better off after trade.
Similarly earlier canada had 125 units of both product but now it has 175-125= 50 units more of pepper. Hence it is also better off after trade.
Mexico Canada Total Peppers 250 125 375 Potatoes 125 125 250Related Questions
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