2. China Product A B C D E F Toys (thousands) 30 24 18 12 6 0 Chemicals (tons) 0

ID: 1168176 • Letter: 2

Question

China

Product A B C D E F

Toys (thousands) 30 24 18 12 6 0

Chemicals (tons) 0 6 12 18 24 30

USA

Product R S T U V W

Toys (thousands) 10 8 6 4 2 0

Chemicals (tons) 0 4 8 12 16 20

a. What is the domestic opportunity cost of producing the two goods in China?

b. What is the domestic opportunity cost of producing the two goods in U.S.?

c. Which country should specialize in toys?

d. Which country should specialize in chemicals?

(a) If China decides to produce only 1 good, it can produce either 30 toys or 30 chemicals.

So, opportunity cost of toys = opportunity cost of chemicals = 30 / 30 = 1

(b) If US decides to produce only 1 good, it can produce either 10 toys or 20 chemicals.

So, opportunity cost of toys = 20 / 10 = 2 chemicals

opportunity cost of chemicals = 10 / 20 = 0.5 toys

(c) China's opportunity cost of producing toys in terms of chemicals is lower than that of US (1 < 2). So China should specialize in toys.

(b) US's opportunity cost of producing chemicals in terms of toys is lower than that of US (0.5 < 1). So US should specialize in chemicals.

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